Financing Your Custom or Semi-Custom Home: Construction Loans and Budgeting Tips

Designing a custom or semi custom home in Arizona is exciting. Financing it is usually the part that feels less exciting and more intimidating. Between construction loans, interest only payments, closing costs, and change orders, many buyers in Scottsdale and the greater Phoenix area are unsure where to start.

A clear plan makes the process much easier. This guide explains how construction financing typically works, what lenders look for, and how to build a realistic budget for your custom or semi custom home.

How Construction Loans Work

A construction loan is a short term loan used to fund the cost of building a new home. Instead of receiving one lump sum at closing, the lender releases money in stages, called “draws,” as different phases of construction are completed. Common draw stages include:

• Site preparation and foundation

• Framing

• Rough mechanicals (plumbing, electrical, HVAC)

• Interior finishes and fixtures

• Final inspection and completion

During construction, many loans require interest only payments on the amount that has been drawn so far. When the home is finished, the loan usually converts to a standard long term mortgage or is refinanced into a separate permanent loan.

Because construction loans involve more risk than a traditional purchase, lenders typically review:

• Your credit profile and income

• The appraised value of the completed home

• Detailed construction plans and cost breakdown from your builder

• The builder’s credentials and track record

Down Payment Expectations

Down payment requirements for construction and construction to permanent loans are often higher than those for existing homes. Many lenders expect total borrower equity in the range of 10 to 20 percent of the project cost, sometimes more for larger or more complex builds.

Equity can come from:

• Cash

• Value of land you already own, if certain conditions are met

• A combination of land value and cash

Since each lender sets its own guidelines and risk tolerance, buyers should review current requirements directly with a bank, credit union, or mortgage specialist that offers construction loans in Arizona.

Construction-to-Permanent Loans

Many Arizona buyers prefer a construction to permanent loan. This option finances the build and then converts to a long term mortgage after completion, typically without a second full closing.

Advantages can include:

• One closing process instead of two

• Interest only payments during construction

• Ability to lock in a rate for the permanent phase with certain products

Exact terms, fees, and rate lock options vary by lender, so it is important to compare offers and ask detailed questions about conversion timing and closing costs.

Why a Contingency Fund Is Essential

Prices for materials and labor can shift, and custom design changes are extremely common. A dedicated contingency fund, often in the range of 5 to 10 percent of the total construction budget, provides a cushion for:

• Upgraded finishes

• Unseen site conditions

• Code-related changes

• Schedule delays

Without a contingency, change orders can put stress on both the project and your finances.

Key Budgeting Tips for Custom and Semi Custom Homes

Prioritize Needs vs Wants

Separate non negotiable items, such as number of bedrooms or overall square footage, from features that are “nice to have.” This makes it easier to adjust if bids come back higher than expected.

Understand Allowances

Many contracts list “allowances” for items such as flooring, cabinets, appliances, and lighting. If your preferences exceed these allowances, your final price will increase. Review each category with your builder and adjust to realistic levels before you finalize the contract.

Plan for Soft Costs

Soft costs include architectural design, engineering, permits, surveys, and certain utility fees. These can add a meaningful amount to the total project budget and should be included in your financing plan.

Consider the Timing of Rate Locks

Interest rates can affect your total monthly payment once the construction phase ends. Some lenders allow extended rate lock options for construction to permanent loans, sometimes with additional fees. Ask for current details, since programs and pricing change over time.

Evaluate Payment Comfort, Not Just Approval Amount
Lenders may approve a higher amount than you are comfortable spending each month. Review your full financial picture, including savings goals and lifestyle expenses, before deciding how far to stretch your budget.

Questions to Ask Your Lender

When you meet with a lender, consider asking:

• What types of construction or construction to permanent loans do you offer?

• What down payment is required for my type of project?

• Are payments interest only during construction?

• How are draws handled and how often can they be requested?

• What inspections are required at each draw stage?

• How does the loan convert to a permanent mortgage, and what are the fees?

• How long can you lock an interest rate, and what happens if construction takes longer than expected?

Clear answers to these questions help you compare lenders and avoid surprises.

Working as a Team: You, Your Builder, and Your Lender

The most successful projects in Scottsdale and the rest of the Phoenix metro area usually involve a strong partnership between the homeowner, builder, and lender. Your builder provides accurate cost information and timelines. Your lender structures financing that matches the project. You make decisions based on both design goals and long term financial comfort.

Final Thoughts

Financing a custom or semi custom home does not have to feel overwhelming. With the right builder, a detailed budget, and a lender familiar with construction projects in Arizona, you can move through each stage with confidence. Before you begin designing floor plans and selecting finishes, take time to understand your financing options and build a budget that supports your vision and your future.