Top 9 Financial Steps to Building a New House in 2025 (Updated)

The steps for building a new house differ from those for securing funds to purchase an existing structure. You’ll need a construction loan before breaking ground, which is separate from a regular mortgage. Preparing for the financial steps to building a house can save you time and energy throughout a long but rewarding process.

How Much Is the Average Build Cost per Foot?

The cost of your custom home build depends on where you live in the U.S. In New York, costs are highest at $345 to $690 for a single-family home and $240 to $470 per square foot for a double-family home. However, in more remote areas, costs may be significantly lower. In Phoenix, costs start at $195 to $525 per square foot for single-family homes, while a double-family dwelling will set you back $185 to $280. 

Some of the advantages of building include having a home exactly the way you want it. If you’ve chosen to start from scratch, here are the financial steps you’ll need to take. 

1. Start at the Bank

Before you start looking for land and interviewing builders, you must know the exact details of your financial profile. Start at the bank and get a letter of preapproval, which includes a credit assessment from one or more of the top three credit bureaus, like Experion, Transunion and Equifax. Most mortgage and construction loan lenders refer to all three of the top credit agencies’ reports to ensure your repayment rating is good enough to justify the risk of a substantial loan.

Once you have the preapproval, the bank will advise you of these vital steps they require, which include:

• Contracting a reputable and registered builder: The builder must usually be bonded and licensed for the bank to approve payments.
• Liaising with architects to draw up the house plan: It is usually submitted to local building authorities for approval.
• Building contractor draws and stages of approval: The builder usually draws money from the bank loan at preset construction stages, which require inspections to ensure the money goes toward the budgeted amount. 

2. Buy Land

Unless you’re purchasing a turnkey property that’s all-inclusive from a new development catalog, you’ll have to do some legwork yourself, which starts with finding the land. It may be

working with a builder who has lots in a neighborhood and will roll everything into one package, you’ll need to secure a location to build your home. 

Buying the property outright and securing a separate construction loan may be best. You could also take out a loan for some acreage as one of the financial steps to building a house, but ensure your finances cover everything. You’ll still need to qualify for the funds required to build.

Buyer beware — buying land differs from purchasing a fully developed property. You may need to look in neighborhoods that aren’t as heavily developed to find empty lots. Questions you need to ask when identifying potential sites and budgeting for your new home include: 

Are There Power, Water and Sewage Services on the Property? 

Let’s be real — you can find dirt-cheap rural land deals, but unexpected expenses could tank your housing dreams unless the rugged, off-grid lifestyle doesn’t scare you. For example, drilling for water can cost between $25 to $65 per foot, and most wells cost upward of $5,000 to drill and finish. 

Access to city utilities will increase your property costs significantly, but the convenience is worth it for many. Adding a septic system also contributes to the cost of building a home, as does adding solar panels, windmills or other alternative energy-generating sources if you are off the grid.

What Are the Building and Zoning Restrictions? 

Maybe you dream of the tiny home life — but finding areas that allow such structures can prove more challenging than you think. Ensure you know what activities are and aren’t permitted. For example, if you want to start a small farm and raise chickens, you must first ensure zoning regulations allow livestock. 

Likewise, a particular urban area may enforce restrictions on building materials and require relevant site licenses and insurance. Your knowledgeable builder should inform you of all requirements, which is why it’s best to get an in-state builder. 

3. Pay Off Debt

If you need a construction loan, you have several options. The usual choice is a construction-to-permanent loan, which converts to a regular mortgage once the property is built. 

You’ll have to provide a hefty down payment of 20% or more and need an impressive credit score of 700, which requires you to pay off some debt if you are already heavily indebted to creditors. Since it takes months for a credit score to reflect your creditworthiness, you should start cleaning your financial house long before you consider building a home or applying for credit. 

You must also show adequate income to qualify for the loan and the associated repayments. If you work for yourself, you may have to provide more documentation to prove your earnings, such as lengthier bank statements and tax returns for several years.

4. Save a Down Payment

You’ll need to save the required down payment, which is not included in the loan. Saving well before your loan application can help streamline the process and increase your likelihood of approval if you already have the security total saved.  

Additionally, you’ll want enough leftover in the bank for a home emergency fund. It works like a standard emergency fund, but you’ll want to set aside 1% to 4% of your home’s repair value and contribute monthly to this fund. That way, you don’t have to stress when your water heater breaks, or another unanticipated expense arises.

5. Create a Project Timetable

Most banks want to see a timeline for completing each phase. Work with your builder to set dates and projections to share with your loan officer. With a construction loan, the lender releases the money in increments, so the timetable lets the bank see you’re on track and pay as the builder completes projects. The process protects you from disreputable builders who might take your cash and never finish the house.

Local ordinances specify deadlines, although your builder should inform you of these. Although few zoning laws stipulate a maximum build time, permits expire, and officials may assign “inactive construction” penalties for partially completed work that fails to meet deadlines. Knowing the stages of construction and their accompanying time frames will also help your budgeting efforts.

6. Present a Budget Blueprint

Your builder will work with you to determine the types of materials used in construction and their cost implications. The more expensive the materials, the more expensive your final home cost will be. For example, reclaimed wood is less expensive than fresh lumber or cement. 

A budget should examine alternatives if expenses exceed planning and show you’ve thought through different scenarios. The more detailed your blueprint, the easier it is for the lender to decide in your favor.

7. Shop Around

Consider how much the interest rates fluctuate and the implications of converting to a traditional mortgage once the home is built. You can expect a lender’s construction loans to have higher interest rates than their mortgage loans. Choose a lender that meets your needs and leverage various preapprovals from different institutions to get the best deal. 

Each building project is unique. Your builder may have suggestions about the best bank to use for a particular project.

8. Choose a Qualified Builder

Your builder should be bonded and licensed in your area. Check with your local building and zoning counsel for their requirements and how to verify your contractor meets these. Also:

• Ask for references. 
• Check for complaints by reading online reviews and visiting the BBB website. 
• Make sure they have plenty of experience building other homes. 

You may find it harder to secure financing if the bank isn’t sure about the company working on the house. The bank’s job is to protect its investment in case you default, and they may have to sell the property. They don’t want to risk shoddy workmanship or an uninhabitable property.

What about doing the work yourself? Unless you are a licensed and bonded homebuilder, you won’t be able to secure a homebuilding loan without using a professional. Your alternative is to pay cash for the land and begin work yourself. However, you must tread carefully, ensuring you file all the required permits and complete the work to code standards, or your local jurisdiction can condemn your structure.

9. Look at Bridge Loans

If you own land or a dwelling, talk to the lender about a bridge loan to help grab equity out of your current residence to start on the new one. It’s a temporary solution so you can start the process and then secure long-term financing. Remember that the interest rates for bridge loans are often much higher, so you’ll want to convert it as quickly as possible to save money. 

Bridge loans operate similarly to a second mortgage. They’re a terrific financing option for new construction when you spot the perfect property — but can’t buy it until you sell your present property. However, remember that your lender uses your current property as collateral, meaning they can seize your property if you default. 

FAQs: 

1. What Are Some Common Costs When Building a New House? 

In addition to the land cost, you may need to install other infrastructure, such as electricity, water and sewer lines or septic systems. 

2. What Are the Steps to Budget for a New House Construction? 

Your first order of business is finding land and determining its cost with your desired improvements. This will tell you the construction loan amount you need to realize your dream. 

3. What Are Some Financial Mistakes to Avoid When Building a New House? 

Be sure to dot your Is and cross your Ts. Have you accounted for every cost, including adding infrastructure? Have you factored in the cost of permits and licenses? Have you shopped around for the lowest rates? Have you done your research on choosing a reputable contractor? 

Prepare for These Financial Steps to Building a House

You’ll likely run over costs during the building process, and things may go wrong. Add a little cushion into your budget to account for whatever you didn’t plan. Securing financing to build your own home is a bit more complicated than a traditional mortgage, but you’ll wind up with a place ideally suited to your needs that feels like home.

Published on 8/24/2023 – Updated on 02/06/2025