New Construction Loans, Explained Simply
Some investors reach a point where fixing up existing houses stops being enough. Maybe you own a lot. Maybe you found a tear-down where the land is worth more than the house on it. Either way, the question becomes the same: how do you pay for a house that doesn't exist yet?
That's what a new construction loan is for. It's short-term financing for building a house from the ground up, on an empty lot or after a tear-down, with the money released in stages as the house actually gets built. Here's how it works in plain English.
How it's different from a fix-and-flip loan
If you've used a fix and flip loan, a lot of this will feel familiar. Both are short-term. Both are interest-only. Both release renovation or construction money in draws rather than all at once.
The difference is the starting point. A flip starts with a house that exists, so the lender can look at it, compare it to nearby sales, and estimate what it'll be worth once it's fixed. A new build starts with dirt and a set of plans. That puts more weight on three things: the budget, the builder, and the timeline. A lender needs to believe all three before the first shovel goes in.
How the money actually flows
Nobody hands you the full construction budget at closing. Instead, the loan follows the build:
- ClosingThe loan funds the land purchase (or refinances a lot you already own), and the construction budget is set aside for the project.
- Building in stagesWork happens in phases: foundation, framing, rough-ins for plumbing and electrical, drywall, finishes.
- DrawsAs each stage is completed, you request a draw. The work is checked, and the money for that stage is released. We covered how draw schedules work in more detail in our post on rehab budgets and draw schedules.
- CompletionThe house is finished and ready to sell, or to refinance if you plan to keep it.
- PayoffThe sale or refinance pays off the loan. With no prepayment penalty, finishing early means you stop paying interest early.
One nice side effect of draws: since interest is typically charged on money that's actually been released, your early months usually cost less than your later ones.
What 7% mortgage rates mean if you're building
Here's the part worth slowing down on. Your construction loan is short-term. You're not locking in a rate for 30 years. But the people who buy your finished house probably are. Most of them will use a 30-year mortgage, and that's where rate changes show up.
At the same sale price, a higher mortgage rate means a higher monthly payment for your buyer. Buyers shop by monthly payment, so that changes what they can afford. Here is the math:
What your buyer's payment looks like
| Mortgage rate | Monthly payment | Extra vs. 6% | House the 6% budget buys |
|---|---|---|---|
| 6.0% | $2,158 | — | $450,000 |
| 6.5% | $2,275 | +$117 | about $427,000 |
| 7.0% | $2,395 | +$237 | about $405,500 |
| 7.5% | $2,517 | +$359 | about $386,000 |
Reading the table: a $450,000 house with 20% down costs a buyer about $237 more a month at 7% than at 6%. Put another way, the same monthly budget stretches to roughly $405,000 instead of $450,000. Nobody knows where rates will be when your house is finished. That's exactly why the careful move is to plan your sale price using today's rates rather than the rates you hope to see.
And if the house is finished and the timing isn't right to sell, you have options. We walked through them in what to do if your project doesn't sell on schedule, including how a bridge loan can carry a finished property to a better selling window.
Who a new construction loan fits
Our new construction loan program is structured around each project, so there isn't a one-size template. It tends to fit investors who:
- Own a buildable lot, or have one under contract
- Found a tear-down where rebuilding makes more sense than renovating
- Have a builder lined up, or are experienced builders themselves
- Plan to sell the finished house, or refinance and hold it as a rental
Like all our loans, it's business-purpose lending for investment property in Maryland, DC, and Virginia. It isn't for building a home you plan to live in.
A Maryland detail worth checking
Maryland's Home Builder Registration Act requires most home builders to register with the Consumer Protection Division before contracting to build or sell a new home. Builders working only in Montgomery County are handled separately. Before you sign with a builder, it's worth confirming their registration. It takes a few minutes, and it's one of the easiest ways to protect a project.
What to have ready before you call
You don't need everything finalized to start a conversation. But the more of this you have, the faster we can give you real numbers:
- The lot: address, and whether you own it or have it under contract
- Plans, and where you are with permits
- Your builder, and the construction contract if you have one
- A line-item budget
- An expected timeline from groundbreaking to completion
- Your exit plan: sell, or refinance and hold
The takeaway
A new construction loan pays for a house in stages as it gets built, and it's paid off when the house sells or gets refinanced. The loan itself is short-term, so long-term rates matter less for your financing than for your buyer. That's the part to plan around: price the finished house for the buyers who'll actually be shopping, at the rates they'll actually be paying.
Planning a build?
Send us your numbers and we'll look at them with today's rates in mind. There's no cost to that conversation. Call (443) 684-7997 or start with a free quote.
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