The short answer
A construction loan pays for a custom home in stages, called draws, as the builder finishes each phase. You usually pay interest only on the money drawn so far. At Tennessee National, on Watts Bar Lake in Loudon, Tennessee, you buy the homesite first and there is no deadline to build, so you can arrange construction financing when your plans are ready.
Key facts
- Homes at Tennessee National are custom built, so a buyer who borrows to build usually needs a construction loan.
- A construction loan pays out in draws tied to stages of the build.
- The two common types are a one-closing construction-to-permanent loan and a two-closing loan.
- Land you already own can often count toward your equity. Ask the lender how.
- There is no deadline to build after you buy a homesite at Tennessee National.
A construction loan pays your builder in stages as the house goes up, and you usually pay interest only on what has been paid out so far. That is the main difference from a mortgage.
Homes at Tennessee National are custom built. That is the appeal: you get the house you want on the homesite you chose. It also means that, unless you pay cash, you will probably deal with a construction loan at some point. Here is how one works in plain words. This is general information, not lending advice. Terms change, so confirm everything with your own lender.
What is a construction loan?
A construction loan is a short-term loan that pays for a home while it is being built. The lender does not hand over one lump sum. It releases money in stages, called draws, as the builder reaches set points such as the foundation, the framing and the finishes.
Three things follow from that:
- The lender checks progress. Someone usually inspects the work before each draw is paid.
- You usually pay interest only on what has been drawn. The payment grows as the house does.
- The loan ends when the house is done. At that point it either turns into a regular mortgage or gets paid off by one.
What are the two main types of construction loan?
There are two: one that closes once and one that closes twice. The table shows the usual pattern, and each lender's version differs.
| Construction-to-permanent | Stand-alone construction loan | |
|---|---|---|
| Closings | One | Two |
| When the home is finished | The loan converts to a regular mortgage | A separate mortgage pays it off |
| The upside | One approval and one set of closing costs | You can shop for the mortgage once the home is built |
| The catch | More is decided up front | You qualify twice and pay closing costs twice |
Which one fits depends on your cash, your plans and what lenders are offering when you apply. Ask for both versions in writing and compare the full cost, not one line.
How does owning your homesite help?
Owning the land helps because many lenders count it as part of what you bring to the project. That can lower the cash you need when the construction loan closes.
This is where Tennessee National's rules work in your favor. You buy the homesite first, and there is no deadline to build. You can hold the land for years, pay it off or buy it outright, and walk into a construction lender already owning the land. See cash or financing and how financing a lot works.
Lenders do not all treat land the same way. Ask each one how they would value a homesite you already own and how much of that value they would credit.
What does a lender need before it approves a build?
A lender needs to see that the house is designed, priced and in capable hands. Expect to provide:
- Plans and specifications. Detailed enough to price.
- A signed contract with a builder. Lenders usually review the builder too.
- A budget. With an allowance for surprises.
- An appraisal. Based on the plans, of what the home will be worth when finished.
- Your own finances. Income, debts, credit and cash reserves.
At Tennessee National there is one more piece. Homes go through design review, so get the current design guidelines first and plan for review before the plans are final. Design rules for homes and how building a home works show where each step falls.
What should you ask a construction lender?
Ask these eight questions, and ask more than one lender.
- Do you lend on custom homes in gated communities in Loudon County?
- Do you offer one closing, two closings, or both? What is the full cost of each?
- How do you credit land I already own?
- What is the draw schedule, and who inspects before each draw?
- What happens if the build runs longer than planned?
- When is my interest rate set?
- What do you need from my builder?
- How much cash do you want me to hold in reserve?
Plain answers to all eight make lenders much easier to compare.
What drives the cost of construction financing?
The size of the loan, the length of the build and the lender's fees drive most of it.
A bigger or more detailed house needs a bigger loan. A longer build means more months of interest. Closing costs, inspection fees and any charge for extending the loan add to the total. Ask for a written estimate of all of it before you commit.
We do not publish rates or fees. Pricing for homesites and Land & Home packages is in the info pack.
What if you would rather skip a construction loan?
You have three ways around it. Pay cash for the build. Buy a finished home from the properties page with a regular mortgage. Or ask your land consultant how a Land & Home package is paid for, since it combines the home and the homesite.
The honest part
A construction loan is more work than a mortgage. There is more paper, more people and more that can change along the way. Builds can run over. Prices can move while you are building. Keep a cushion beyond the budget.
The good news at Tennessee National is that nothing forces the timing. With no deadline to build, you can wait until the plans, the builder and the loan all line up, and start then.
Frequently asked questions
Do you need a construction loan to build at Tennessee National?
Only if you are not paying cash. Homes at Tennessee National are custom built, so a buyer who borrows will usually need a construction loan rather than a standard mortgage. A lender can explain the options once plans and a builder are in place.
Can you use your lot as a down payment on a construction loan?
Often, yes. Many lenders count land you already own as part of your equity in the project. Each lender values it differently, so ask how a Tennessee National homesite would be credited before you apply.
What is a construction-to-permanent loan?
A construction-to-permanent loan is a single loan with one closing. It pays for the build in draws, then converts to a regular mortgage when the home is finished. Buyers building at Tennessee National can ask lenders to quote it beside a two-closing loan.
When should you apply for a construction loan?
Apply when the plans are far enough along for a builder to price them. Lenders usually want plans, a builder contract and a budget. At Tennessee National, plans also go through design review, so ask the lender and the builder how to order the steps.
Facts about Tennessee National come from the community. Lake facts come from TVA. Rules, taxes, loans and insurance change, so confirm anything that affects a purchase with the right office or professional before you buy.