A Guide To Self-Build Construction Loans

Photo of author

By Jacob Maslow

  • Fund your self-build project with a construction loan
  • Choose from several types of construction loans
  • Get funds even if you don’t have a perfect credit history
  • Get help from experts who can guide you through the process

If you have a plot of land, a building permit, and a set of plans, you have all you need to build a home. Now all that is required is funding. A traditional mortgage isn’t the right choice if you are constructing a home since mortgages are designed for an existing property. Getting self-building construction loans is the best option for people who want to build their own homes or business locations. 

Getting self-build construction loans can be easy or challenging depending on many factors, such as your credit history, experience with building the property, and how much of a down payment you are willing to provide. There are also several types of self-building construction loans to choose from, depending on your other funding sources, how you plan to work, and which type of construction loan you can get. 

How Self-Build Construction Loans Work

Many home loans include traditional mortgages, home equity loans, and construction loans. Self-build construction loans differ from conventional mortgages because, for the latter, the lender gives the borrower all of the money upfronts so they can pay for the property. 

With home construction, the building does not already exist. No property will give the borrower collateral against the loan if the borrower defaults. This puts the lender at a disadvantage and is why home construction loans are given incrementally rather than in one large amount at the beginning. 

Instead, the lender gives the borrower money in portions as the construction progresses. This can be done either in the form of an advance or in arrears. When the loan is approved, the lender will decide to give a certain amount to the borrower and will usually keep 10% to be given to the borrower after the home construction is completed. 


With this self-build construction loan, the lender releases specific amounts before each project phase. This enables the borrower to pay for materials and labor to complete that part. Suppose the expenses of a particular section are more significant than the amount released. In that case, the borrower can either make up the difference with a temporary bridge loan or, in some cases, negotiate with the lender to release more of the total funding at that phase. This can mean they will have less money later, so borrowers should use caution before using this option. 


This is the opposite of the advanced self-build construction loan. The borrower comes up with the funding to start the building process and is given the money at the end of that phase of the project. This type of self-build construction loan is usually much easier to get than the advanced type because the burden of funding is on the borrower for each phase of the project. Often, bridge loans are needed until the new phase of the loan is granted. 

Advantages of Self-Build Construction Loans

On the plus side, self-build construction loans may offer less risk than traditional mortgages. Imagine what would happen if all the money was loaned upfront before the building began and a natural disaster or a revoked permit made construction impossible. 

In the case of a disaster, insurance may cover part of it, but the result, in either case, would be that the borrower would be in massive debt if they had begun construction with no way to pay it back since there is no home to sell to pay it off. With self-build construction loans, the owner is only given part of the loan and, therefore, has only part of the debt at any given point. 

Self-build construction loans can be cheaper than a regular mortgage if the house is built affordably. Depending on where you live, the taxes may be lower if you build on property you own rather than purchasing a home outright. 

Drawbacks of Self-Build Construction Loans

Self-build construction loans are harder to find than traditional mortgage loans so you may have to do some searching before you find one. If this is the first time you have built property, you may find that premiums are higher. Also, since the money for the loan is released incrementally, you may find your expenses during part of the building exceeds what you are given.

The need for more funding for certain phases of the project, including the beginning of an arrears loan instead of an advance loan, means that the borrower may need to take out several types of loans, including the self-build construction loan, which results in more indebtedness. This could cut into any cost savings the DIY project may provide. 

When Are Self-Build Construction Loans Worth It?

Despite a few negatives, many find that self-build construction loans are worth some risks and the reliance on bridge loans or other forms of funding. Those who benefit most from these loans have built property before and know when a project goes beyond the budget and how to plan for the unexpected. 

It is also essential to look into what types of insurance coverage you can get during the project to protect against theft, vandalism, and inclement weather. 

Make sure your plans are sound and that you are working with an experienced architect with a solid reputation.

To qualify for a self-build construction loan, you should have a good credit score, all the required permits, and be ready to submit your plans to the bank. Be patient and explain the project thoroughly. Approval for self-build construction loans often takes longer than for traditional mortgages, so give yourself time and present your project in the best light. 

Self-Build Construction Loans Can Fund Your Deam Home

Whether you are committed to building your dream home or want to construct an investment property, a self-build construction loan is the best way to fund your project. Working with someone with experience with these types of loans and building a property is worthwhile. Don’t let a plot of land sit empty, but make plans and secure the funding to build your dream home today. 

Alternatives to Self-Build Construction loans

If you cannot secure a self-build construction loan, other options may be available. For example, you could consider an unsecured personal loan or a home equity line of credit (HELOC). An unsecured personal loan does not require collateral and the interest rate is usually higher than a secured loan. A HELOC works the same way as a regular mortgage but with less stringent requirements and lower interest rates. Lastly, you could also explore government grants for construction projects or apply for loans from non-profit organizations that specialize in lending money for housing initiatives. No matter what option you choose, it’s essential to research and ensure that you understand all of the terms and conditions associated with the loan.  Ultimately, you want to find an option that will meet your needs and ensure that your dream of building a home is realized.

Do I need a down payment for a self-build construction loan?

Yes, most banks require a down payment of 20% or more.

Can I use the loan to buy land?

Yes, depending on your lender and project plans.

How long do self-build construction loans take to be approved?

Approval can take anywhere from several weeks to 6 months, depending on the bank and the complexity of your project.

What kind of insurance should I get for my project?

You may need different types of coverage like builder’s risk, worker’s compensation, liability, and property insurance. Speak with your lender and an insurance agent to determine what type of coverage is best for your situation.

Are self-build construction loans cheaper than traditional mortgages?

It depends on the loan size and where you live, but in some cases, they can be more cost-effective. Speak with a financial advisor or bank to determine if a self-build construction loan is the right option for you.

Are self-build construction loans risky?

As with any loan, there is a risk that you may not have enough money to complete the project. Make sure to speak with an experienced lender and architect and work within your means when building. That way, you can reduce the risks of taking on such a large financial obligation.


Images Courtesy of DepositPhotos