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Answering Your Top Rural Home Construction Questions

A Rural 1st loan officer with a client on the construction site of a rural home.

You’ve decided to build a rural home but aren’t quite sure how to get started. If you’ve never built before, you may wonder how financing for rural home construction works… Don’t worry! Our expert team at Rural 1st is here to help you make informed decisions.

How does a construction loan differ from a traditional home loan?

Construction loans are structured to provide a specified amount of time and financial resources to build your home with a distribution schedule that releases funds throughout the construction process. We set up loans to be consumer-friendly by offering fixed rates, phased disbursements and a one-time close. Unlike traditional mortgages, the home’s value is calculated based on the anticipated completed value using the plans, bids and specifications provided to the appraiser. The interest portion of the Principal and Interest (P&I) payment is based on the amount of funds that have been distributed. These features allow you to feel confident in your financial position at the end of your project.

How do I calculate what my new home construction costs will be?

Knowing all the costs to construct your home is critical to the project’s success. In addition to the builder’s bid, you’ll need to consider the expense of the lot, site preparation, water/sewer, electrical/gas access and driveway access, in addition to less obvious expenses like architectural drafts, builder’s insurance and permits. A reputable builder will be transparent about cost, so if you don’t see these line items on your bids you may want to ask more questions.

How much cash will I need to build a new house?

Calculating your total cash needed to start your home-building project is an important step in knowing how much you can afford. While several variables impact the required amount, the primary cash requirements are down payment, loan closing costs and cash reserves. The down payment varies based on the type of home you decide to build and any equity in your land, closing costs vary based on the loan amount and a cash reserve is based on construction costs.

How do I know what portion of my construction project can be financed and can I figure this out before I have final plans and bids?

The financed amount of the project will vary based on the type of home and how much, if any, of the work you plan to complete yourself. The financed portion can be as high as 85% of the appraised value of the completed home and land. There will only be one appraisal, completed for the lender, in the beginning of the project. The more complete the plans, bids and specifications, the more accurately the appraiser can value the proposed dwelling.

What are the benefits of a one-time close construction loan and how does the process work?

Rural 1st uses a one-time loan closing because this process allows our customers to close with a fixed interest rate, a lower down payment and only one set of closing costs. The one-time closing process does not require you to go through another loan application or approval process and closing occurs before construction begins. The loan funds are distributed throughout the construction process and permanent financing is then put in place once the home is complete.

What will my mortgage payments be during construction and once my home is complete?

We only charge you interest on the money that you are borrowing to use for your project. You will start paying down your loan immediately through the principal portion of your payment, but the interest is based only on the funds that have been distributed. You will know your final payment amount at closing before any disbursement of funds.

How does a construction loan work if I need to purchase my lot versus already owning my lot?

We can help whether you do or do not own the lot you plan to build on. If you haven’t already found and purchased your lot, we can take care of financing that, too. It’s best to work with a reputable real estate professional who can help you evaluate the features of the lot. You want to have an idea of the home you want to build and find a lot that will align with your desired outcome. If you already own the lot you plan to use, the land will be included in the appraised value. If you have any existing loans on the lot, they can be refinanced into your construction loan so you have one monthly payment. If you own the land free and clear, the equity you have in the land can help offset your down payment requirement.

Do I need to work with a specific builder?

At Rural 1st, we do not require you to use a specific builder, but we do have requirements your builder must meet to ensure you have as smooth of a construction project as possible. Residential construction must be the builder’s full-time occupation and the builder must be able to manage the scheduling of all subcontractors and ordering of all materials. Your Rural 1st Loan Officer may also request two to three addresses of other homes the builder has built for verification.

What types of homes does Rural 1st finance?

When selecting your home’s design, Rural 1st can work with you to finance a wide variety of home types. The standard ‘stick-built’ or modular constructed homes are the most common types, but we also finance more unique homes, including barndominiums, log and post-frame homes.

How long do I have to build with a construction loan?

Rural 1st offers a 12-month construction period to build your home. While 12 months sounds like plenty of time, it can go by very quickly. Your team at Rural 1st will be working with you to help identify delays out of your control—such as adverse weather, supply shortages, etc.—that could cause issues with completing your home.

The construction process can be daunting, but we’re here to guide you every step of the way. Visit our construction loans page to learn more about home building.

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