4 Financing Options for Building Custom Homes on Your Lot (FAQ Guide)
Building a custom home on your lot is an exciting journey, but one question stops many families before they start: "How do we pay for this?" Unlike buying an existing home with a traditional mortgage, building custom requires specialized financing that covers land, construction, and eventually converts to your permanent home loan.
The good news? You have more financing options than you might realize. From single-close construction loans that simplify the process to creative financing strategies that leverage your existing assets, there's likely a path that works for your situation. Understanding these options—and asking the right questions—helps you move from dreaming about your custom home to actually building it.
At Keel Custom Homes, we've guided hundreds of Richmond families through the financing process. While we don't provide loans ourselves, we've seen every financing scenario and can help you understand what lenders will need. This FAQ guide breaks down the five most common financing paths for building on your lot in Central Virginia, with the essential questions you need to ask.
Option 1: Construction-to-Permanent Loans (One-Time Close)
What is a construction-to-permanent loan?
A construction-to-permanent loan, also called a "one-time close" or "single-close" loan, combines your construction financing and permanent mortgage into one loan package. You apply once, qualify once, and close once—at the beginning of your project. During construction, you pay interest only on the amount drawn. Once your home is complete, the loan automatically converts to a traditional mortgage.
How does the draw process work?
Your lender releases funds in stages as construction progresses, typically through 5-7 draws:
Foundation completion
Framing and roof
Rough mechanicals
Insulation and drywall
Flooring and cabinets
Final completion
The builder requests each draw after completing specific milestones. A lender inspector verifies the work before releasing funds. You only pay interest on the amount drawn, not the full loan amount.
What are the advantages of one-time close loans?
Single qualification process: You only need to qualify once, protecting you from rate changes or credit issues that could arise during construction.
Locked-in rate options: Some lenders offer rate locks for the entire process, providing certainty about your permanent mortgage payment.
Lower closing costs: One closing means one set of closing costs, potentially saving thousands compared to separate construction and permanent loans.
Simplified process: Less paperwork, fewer appointments, and streamlined coordination between construction and permanent financing.
What are the potential drawbacks?
Stricter qualification: Lenders take more risk with one-time close loans, often requiring higher credit scores and lower debt-to-income ratios.
Less flexibility: Terms are set at the beginning. If your situation improves during construction, you can't negotiate better permanent financing rates.
Limited lender options: Not all lenders offer these programs, potentially limiting your choices for rates and terms.
Who is this best for?
Construction-to-permanent loans work best for borrowers with stable employment, good credit (typically 680+), and confidence in their long-term financial situation. They're ideal if you want simplicity and protection from rate changes during construction.
Questions to ask lenders:
Can I lock my permanent rate at application, or does it float?
What happens if construction costs exceed the original budget?
How long do I have to complete construction?
What are the minimum down payment requirements?
Are there prepayment penalties if I want to pay off the loan early?
Option 2: Stand-Alone Construction Loans (Two-Time Close)
What is a stand-alone construction loan?
A stand-alone construction loan covers only the building phase. It's a short-term loan (typically 12-18 months) that you pay off with a separate permanent mortgage once construction is complete. This "two-time close" approach means two separate loan applications, qualifications, and closings.
How is this different from construction-to-permanent?
With stand-alone construction loans, you have complete flexibility for your permanent financing. After construction, you can shop for the best mortgage rates, choose different lenders, or even pay cash if your situation changes. You're not locked into terms set before construction begins.
What are the advantages?
Maximum flexibility: Shop for the best permanent mortgage rates after construction. If rates drop or your credit improves, you benefit.
Easier initial qualification: Some lenders have less stringent requirements for construction-only loans since their risk is shorter-term.
More lender options: Many banks offer construction loans even if they don't have one-time close programs.
Potential for better terms: If your home appraises higher than construction costs, you might qualify for better permanent financing terms.
What are the challenges?
Two closings mean double closing costs: You'll pay full closing costs twice, potentially adding $5,000-$10,000 to your total expense.
Rate risk during construction: If interest rates rise during building, your permanent mortgage will be more expensive.
Qualification risk: You must qualify for the permanent loan after construction. Job loss or credit issues during building could jeopardize your financing.
Balloon payment pressure: The construction loan must be paid off at completion, creating pressure to secure permanent financing quickly.
Who should consider this option?
Stand-alone construction loans suit borrowers who expect their financial situation to improve, want maximum flexibility, or find better terms on construction-only financing. They're also useful if you're considering paying cash but want to preserve liquidity during construction.
Key questions for lenders:
What happens if construction extends beyond the loan term?
Can the construction loan be extended if needed?
What are the interest rate options during construction?
How much cash reserve is required?
What documentation is needed for the permanent loan?
Option 3: Owner-Builder Construction Loans
What is an owner-builder loan?
Owner-builder loans are designed for property owners who want to act as their own general contractor. Instead of hiring a builder like Keel Custom Homes to manage the entire project, you coordinate subcontractors, order materials, and oversee construction yourself.
Why are these loans harder to get?
Lenders see owner-builders as higher risk because:
Most homeowners lack construction experience
Project delays and cost overruns are more common
Quality control is less certain without professional oversight
There's no builder warranty or accountability
Many lenders require proof of construction experience, detailed project plans, and larger down payments (often 25-30%) for owner-builder loans.
What are the potential benefits?
Cost savings: Eliminating general contractor markup might save 15-20% on construction costs.
Complete control: Every decision is yours, from subcontractor selection to material choices.
Personal satisfaction: The accomplishment of building your own home is unmatched.
What are the real risks?
Time commitment: Managing construction is a full-time job. Expect to spend 20-40 hours weekly on your project.
No buffer for mistakes: Professional builders absorb some overages. As owner-builder, every mistake costs you directly.
Liability exposure: You're responsible for worksite safety, insurance, and subcontractor issues.
Financing challenges: If you can't complete the project, selling an unfinished home is difficult and costly.
Who might succeed with owner-builder financing?
This option works for people with genuine construction experience, flexible schedules, and strong project management skills. If you're a contractor yourself, recently retired with time to dedicate, or have successfully managed construction projects, you might consider this path.
Critical questions to ask:
What construction experience documentation is required?
How are draw inspections handled without a licensed contractor?
What happens if I decide to hire a contractor mid-project?
Are there restrictions on which subcontractors I can use?
What additional insurance is required?
Option 4: Lot Loans Plus Construction Financing
What is a lot loan?
A lot loan finances your land purchase separately from construction. These loans typically require 20-30% down and have shorter terms (5-10 years) with higher rates than traditional mortgages. Some are structured as balloon payments requiring refinancing or payoff within a few years.
How does this work with construction financing?
The two-step approach involves:
First: Secure lot financing to purchase your land
Then: Obtain construction financing that pays off the lot loan and funds building
Many construction loans will pay off existing lot loans as part of the initial draw, rolling everything into one construction loan amount.
Why choose separate lot and construction loans?
Time to plan: Buy your land now, build when you're ready. This gives you time to finalize plans, accumulate savings, or wait for better market conditions.
Lock in your location: In competitive markets, securing your ideal lot prevents losing it while arranging construction details.
Improved loan terms: Owning your lot outright or having substantial equity often qualifies you for better construction loan terms.
Tax benefits: Lot loan interest might be tax-deductible if you build within a certain timeframe (consult your tax advisor).
What are the challenges?
Two loans mean complexity: Managing multiple loans with different terms requires careful planning.
Carrying costs: You're paying for land you're not yet using, plus potential property taxes and maintenance.
Timeline pressure: Some lot loans require beginning construction within a specific timeframe or face rate adjustments.
Who should consider this approach?
This strategy works if you've found perfect land but aren't ready to build immediately, want to secure appreciating property, or need time to sell your current home. It's also helpful if you're improving your credit or saving for a larger construction down payment.
Essential questions to ask:
Can the lot loan be subordinated to construction financing?
Are there penalties for paying off the lot loan early?
What are the requirements for beginning construction?
How does lot equity count toward construction loan down payment?
What happens if construction plans change?
Choosing Your Best Financing Path
Every family's financial situation is unique. The best financing option depends on your assets, income, credit profile, timeline, and risk tolerance. Consider these factors:
Your timeline: Need to build immediately? One-time close might be best. Have time to plan? Consider lot purchase now, construction later.
Your resources: Strong income and credit? Traditional construction loans offer good terms. Substantial assets but complex income? Asset-based financing might work better.
Your risk tolerance: Want certainty? Lock in one-time close rates. Comfortable with some risk for potential savings? Two-time close provides flexibility.
Your involvement: Ready to manage everything? Owner-builder could save money. Want professional management? Traditional construction loans with builders like Keel make sense.
Common Questions Across All Financing Options
How much down payment do I need?
Most construction loans require 20-30% down, though some programs accept 10-15% with excellent credit. Your land equity often counts toward the down payment requirement.
What credit score is required?
Conventional construction loans typically require 680+ credit scores, with better terms above 720. Portfolio lenders might be flexible with strong compensating factors.
How long does approval take?
Allow 30-45 days for full approval. Start the conversation with lenders early—even before selecting your builder—to understand your options.
What documentation is needed?
Expect to provide:
Two years of tax returns
Recent pay stubs or income verification
Asset statements
Builder contract and plans
Lot information and value
Detailed construction budget
Your Next Steps
Understanding financing options is crucial, but execution makes the difference. Here's how to move forward:
1. Check your credit: Review your credit reports and address any issues before applying.
2. Calculate your budget: Include land, construction, and carrying costs. Our Cost Calculator can help estimate construction expenses.
3. Interview multiple lenders: Construction lending varies significantly. Compare at least three options.
4. Get pre-qualified: Understand your borrowing capacity before falling in love with plans beyond your budget.
5. Coordinate with your builder: Experienced builders like Keel Custom Homes understand lender requirements and can provide necessary documentation promptly.
Ready to Build? We're Here to Help
While Keel Custom Homes doesn't provide financing, we've helped hundreds of Richmond families navigate these options successfully. We understand what lenders need and can provide detailed budgets, timeline projections, and documentation that make your loan approval smoother.
Our experience with every financing type means we can adapt our process to your lender's requirements. Whether you're using construction-to-permanent financing or paying cash, we'll coordinate draws, inspections, and documentation to keep your project moving.
Take the first step:
Use our Cost Calculator: Understand construction costs for better loan planning
Schedule a consultation: Discuss your project and how we support your financing approach
Connect with preferred lenders: We can recommend lenders familiar with custom construction
Building your custom home starts with understanding your financing options. With the right knowledge and team, your dream home on your perfect lot is closer than you think.
Contact Keel Custom Homes today. Let's discuss your vision and how we can help make it reality, regardless of your financing path.