How to Finance New Home Construction in Minnesota

Home loans. They’re a stressful subject for just about everyone. But they’re also unavoidable if you won’t be paying for your new home entirely out of pocket. 

So today, let’s face this subject head on. In this article, we’ll explain the funding process we use at Country Joe Homes, and discuss how this builder-financed approach differs from the buyer-funded approach that many other builders employ. By the end of this article, you’ll have the knowledge you need to make a stress-free choice that’s right for your budget.

The Easiest Route: Builder-Financed Construction

At Country Joe Homes, we were looking for ways to make the new home financing process as streamlined and hassle-free as possible for buyers. That’s why we settled on a "builder-financed" or "turnkey" approach. With this structure, we purchase the land and fund the entire home build process, from breaking ground to the final punch list. Then, once everything is complete, the buyer purchases their finished home from us. The steps look like this:

Step 1: The buyer puts down a deposit, referred to as earnest money, upfront. 

Step 2: Country Joe Homes covers all costs during the construction phase. 

Step 3: Upon completion of construction, the buyer secures a traditional home mortgage to purchase their finished home.

In our experience, this method has numerous advantages over traditional buyer-funded financing, including:

• The buyer doesn’t have to pay any interest on the loan while their house is being built.
• The process has fewer complications for the buyer, including:
  
  • No need to establish draw schedules with the bank.
  • Only standard mortgage qualifications are required
  • Only one closing required
• There’s no need to worry about fluctuating interest rates during the construction process.

Buyer-Funded Financing: Minnesota Construction Loans

When builders don’t offer internal financing, the only option buyers have is to secure construction funding from an outside institution. And there are two main types of loans these institutions will offer: 

• One-Time Close (Construction-to-Permanent Loan): Starts as a standard construction loan while the house is being built. Then, once construction is finished, it automatically converts to a traditional 15- or 30-year mortgage. 
  
  • Pros: The buyer only has to pay one set of closing costs.
  • Cons: Harder to qualify for than a standard mortgage.
• Two-Time Close (Stand-Alone Construction Loan): This type of loan is used strictly during the building phase. Then, once the home is complete, the buyer must apply for a new mortgage to pay off the construction loan. 
  
  • Pros: The buyer may be able to secure a better rate for their second loan. 
  • Cons: Double the closing costs + harder to qualify for than a standard mortgage.

One more factor to bear in mind: both of these buyer-funded loan types also require the management of a draw schedule. This is a big distinction from a traditional mortgage, where the funds are released all at once. With draws, the bank will release funds to the builder in phases. These phases are separated by specific construction milestones, which usually need to be inspected and approved prior to disbursement. Understandably, this process adds another layer of complexity for the buyer, and can easily become a major source of stress.

Alternative & Government-Backed Construction Financing

These are also buyer-funded lending options, but each one applies to a much smaller number of buyers. If you qualify, they may be a good option, depending on your priorities.

• USDA Construction Loans: If you’re looking to build your primary residence in rural Minnesota, you may qualify for a Section 502 Guaranteed Loan. These loans are single-close, 30-year permanent mortgages and allow for a low or even zero down payment. But you must be below a certain income threshold and above a certain credit score to qualify.
• VA Construction Loans: If you are a Minnesota veteran or active-duty military, you may qualify for a VA Construction Loan. These loans require zero down payment, zero mortgage insurance, and the buyer does not pay interest until construction is complete.  But you can only work with a participating VA lender.
• FHA Construction-to-Permanent Loan: This is a newer government-backed lending option with down payment requirements as low as 3.5%. The home must be your primary residence, and there are substantial restrictions on both the type of home you can build and which builders you can work with.
• Owner-Builder Loans: An extremely uncommon loan type that allows the buyer to act as their own general contractor. Almost exclusively granted to buyers that are already  licensed Minnesota contractors.

Step-by-Step Guide to Securing a Buyer-Funded Construction Loan

1. Budget for a Big Downpayment - Before pursuing a new home construction loan, you need to know how much debt you can take on - and how much you can afford to pay upfront. Most lenders require a down payment between 20% and 30% for a new home.
2. Lender and Builder Vetting - Comparing at least three lenders is important for securing the best terms possible. You will also need to check if each lender will approve your chosen builder.
3. Pre-Approval & Appraisal - Once you’ve chosen a lender, you’ll need to secure pre-approval. During this process, your lender will require an appraiser to evaluate your home’s projected value based only on the architectural plans.

Local Minnesota Regulations & Choosing a Partner

Finally, it’s important to consider whether your builder and lender have sufficient expertise regarding new home construction in Minnesota and your chosen municipality, specifically. This is because local permitting, Minnesota’s changeable weather, and regional lending options can all have a big impact on a project’s overall costs. Navigating these factors requires deep local knowledge, while failure to do so can easily lead to project delays, budget overruns, and loans with terms that don’t align with the day-to-day realities of building in Minnesota.

Conclusion & Call to Action (CTA)

There are many different ways you can finance a new home build. But in our experience, working with a builder who handles all the financing upfront is the most streamlined and stress-free solution. It also gives you, the buyer, a degree of financial security that can’t be matched by buyer-funded options. To learn more about how you can finance your Country Joe Homes build, contact our expert team today. Together, we’ll make the process of building your new home in Minnesota as easy as possible.