New construction financing works differently than a standard mortgage. Learn about construction loans, builder-preferred lenders, rate locks, and the strategies Tennessee buyers use to get the best deal.
How New Construction Financing Differs
Financing a new construction home is fundamentally different from financing a resale purchase. With a resale home, you apply for a mortgage, get approved, and close — typically within 30–45 days. With new construction, the process is more complex and the timeline is longer.
Construction-to-Permanent Loans
For custom homes and some semi-custom builds, buyers use a construction-to-permanent loan (also called a "one-time close" loan). This product works in two phases:
During the construction phase, the lender disburses funds to the builder in draws as construction milestones are completed. You typically pay interest only on the funds disbursed during this phase.
When construction is complete, the loan automatically converts to a permanent mortgage. This eliminates the need for a second closing and a second set of closing costs.
Production Builder Financing
Most production builders — including national builders like LGI Homes, D.R. Horton, Lennar, and Toll Brothers — have their own mortgage subsidiaries or preferred lending partners. These arrangements can offer significant advantages:
Builder incentives: Builders frequently offer closing cost assistance, rate buydowns, or free upgrades to buyers who use their preferred lender. These incentives can be worth $5,000–$20,000 or more.
Streamlined process: Builder-affiliated lenders understand the construction timeline and work closely with the builder's sales team, which can simplify the process.
Rate buydowns: Some builders offer to permanently or temporarily buy down your mortgage rate. A 2-1 buydown, for example, reduces your rate by 2% in year one and 1% in year two, then settles at the note rate. This can significantly reduce your initial monthly payments.
The Rate Lock Challenge
One of the most significant financing challenges in new construction is the rate lock. Most mortgage rate locks last 30–60 days, but new construction can take 6–12 months or longer. This creates a dilemma: lock too early and you may pay for multiple extensions; wait too long and rates may rise.
Strategies Tennessee buyers use to manage this risk include:
Float-down options: Some lenders offer rate locks with a float-down provision, allowing you to capture a lower rate if rates fall before closing.
Extended rate locks: Some lenders offer extended rate locks of 6–12 months, though these typically come at a cost (either a higher rate or an upfront fee).
Builder-affiliated lenders: Many builder-preferred lenders offer extended rate locks as part of their incentive packages, which can eliminate this risk entirely.
Down Payment Considerations
New construction typically requires a larger earnest money deposit than resale — often 1–3% of the purchase price, paid at contract signing. This money is typically non-refundable if you back out without a valid contractual reason, so make sure you're committed before signing.
Down payment requirements for the permanent mortgage are the same as for any home purchase: 3.5% for FHA loans, 3–5% for conventional loans with PMI, or 20% to avoid PMI entirely.
Getting Pre-Approved
Get pre-approved before visiting model homes. Pre-approval demonstrates to builders that you're a serious buyer and gives you a clear picture of your budget. Many builders won't allow you to write a contract without a pre-approval letter.
When comparing lenders, look beyond the interest rate. Consider the APR (which includes fees), the lender's experience with new construction, and the quality of their customer service. A slightly higher rate from a lender who understands new construction timelines may be worth more than a lower rate from a lender who creates problems at closing.
For more guidance on the overall buying process, see our [complete guide to buying a new construction home in Tennessee](/resources/new-home-buying-guide).