Financing a new construction home is different from financing a resale. The timeline is longer, the rate lock question is more complicated, and there’s an incentive package from the builder’s preferred lender that looks appealing on the surface but requires careful evaluation. Understanding how each piece works before you sign a builder contract prevents expensive surprises later.
The Two Main Financing Paths
1. Standard Purchase Loan (Most Common for Production Homes)
For production homes and spec homes with a defined closing date, most buyers use a standard purchase mortgage — conventional, FHA, VA, or USDA — with a rate locked closer to the anticipated closing date. This is structurally identical to a resale purchase loan, with one key difference: the timeline.
A build-to-order home with a 7–9 month construction timeline means you can’t lock a rate at contract and hold it through closing without paying for an extended lock. Most standard rate lock periods are 30–60 days. For longer timelines, you have three options:
Float until closer to closing. Don’t lock until you’re 45–60 days out from the expected closing date. You accept rate movement risk during the construction period. If rates fall, you benefit. If rates rise, you pay more. For buyers who signed in a declining-rate environment, this has historically worked well. In a rising-rate environment, it’s real exposure.
Extended rate lock. Some lenders offer extended lock programs — 90, 120, 180, or even 270 days — for new construction. Extended locks cost money: typically 0.25–0.50% of the loan amount as an upfront fee, though some lenders build the cost into the rate. On a $300,000 loan, a 0.375% extended lock fee is $1,125. That’s the cost of certainty. Compare whether the extended lock fee is lower than your realistic downside from rate movement.
Float-down option. Some extended lock programs include a float-down provision — if rates improve by a specified amount, you can re-lock at the lower rate. These add cost but provide both ceiling (rate can’t go above the locked rate) and limited floor (you benefit from significant rate improvements). Ask specifically whether the lender’s extended lock includes a float-down.
2. Construction-to-Permanent Loan (Two-Close or One-Close)
For custom builds, semi-custom homes, and spec builds where the buyer is controlling the construction process rather than buying from a production builder, a construction loan may be required.
Two-close construction loan: The construction phase uses a short-term construction loan that funds draws as construction progresses. At completion (certificate of occupancy), the construction loan is paid off and replaced with a standard permanent mortgage — a second closing with separate closing costs. Two-close gives the most flexibility: you shop lenders independently for each phase and get full market pricing on the permanent loan. The downside is two sets of closing costs and two qualification processes.
One-close (construction-to-permanent): A single loan that converts from a construction loan to a permanent mortgage at completion, with one closing and one set of closing costs. The rate on the permanent portion is typically locked at the time of the original closing. One-close is simpler and cheaper in transaction costs, but the permanent rate is set earlier in the process — which is either an advantage or a disadvantage depending on rate movement.
What construction lenders require: During construction, most lenders require you to own the lot, have an executed contract with a licensed Alabama general contractor, and provide a detailed construction budget. Draws are funded against inspected milestones rather than as a lump sum. Personal income documentation, credit, and reserves are all underwritten before the first draw.
The Builder’s Preferred Lender: Honest Evaluation
Most production builders have a preferred lending partner — sometimes an affiliated mortgage company, sometimes a large national lender that has a formal relationship with the builder. The preferred lender typically offers:
- Closing cost credits ($5,000–$15,000+ depending on the builder and community)
- Rate buydowns (temporary or permanent)
- Upgrade allowances funded through the lending arrangement
These incentives are real. A $10,000 closing cost credit is $10,000. Don’t dismiss it.
But the full loan cost is what matters — not just the incentive.
The right comparison is: (Preferred lender total loan cost over 5–7 years) vs. (Outside lender total loan cost minus the closing cost credit you forfeit).
To make this comparison:
- Get a full Loan Estimate from the builder’s preferred lender — rate, APR, monthly payment, and all fees.
- Get a competing quote from at least one outside lender on the same day for the same loan amount and down payment.
- Calculate the monthly payment difference. If the preferred lender’s rate is 0.25% higher on a $280,000 loan, that’s approximately $48/month more. Over 5 years that’s $2,880 in additional interest — less than a $5,000 closing cost credit.
- Calculate the break-even: how many months does it take for the rate premium to exceed the credit? If you plan to stay beyond that break-even, the outside lender wins. If you’ll sell or refinance before it, the credit wins.
Use the Mortgage Payment Calculator and FHA vs. Conventional Calculator to run these numbers before your design center appointment.
What to ask the preferred lender:
- Is the closing cost credit tied to a specific loan product, or available on any?
- Is the rate being offered with points? (Ask for APR, not just rate)
- Does the credit apply to prepaids and escrow, or only to lender fees?
- What is the rate lock period, and what happens if closing is delayed?
Temporary Buydowns: How They Work
Builders frequently offer temporary rate buydowns — 2-1 buydowns are most common — on spec homes or as community-level incentives. A 2-1 buydown reduces your interest rate for the first two years of the loan:
- Year 1: Rate is 2% below the note rate (e.g., 5% on a 7% loan)
- Year 2: Rate is 1% below the note rate (6%)
- Year 3 and beyond: Full note rate (7%)
The cost of the buydown is paid upfront — typically by the builder as an incentive. The buyer benefits from lower payments in years 1–2. The full note rate applies starting year 3.
The risk: A 2-1 buydown deferred to year 3 can create payment shock if the buyer’s income hasn’t grown proportionally. Budget based on the full year-3 payment, not the year-1 payment, to confirm the home is affordable long-term.
Permanent buydowns: Sometimes called points. Paying 1 point (1% of loan amount) typically buys the rate down by approximately 0.25%. On a $280,000 loan, 1 point costs $2,800 and reduces the rate by 0.25% — saving approximately $46/month. Break-even is about 61 months (roughly 5 years). If you stay longer than 5 years, the points paid off. If you sell or refinance sooner, they probably didn’t.
Alabama-Specific Items
Alabama mortgage tax. Alabama charges $0.15 per $100 of mortgage amount. On a $280,000 mortgage that’s $420 — a real closing cost item that out-of-state buyers sometimes miss when budgeting.
Homestead Exemption. If this is your primary residence, apply for the Alabama Homestead Exemption through the county revenue commissioner after closing. Baldwin County: baldwincountyal.gov. File by December 31 of the year you purchase to receive the exemption on the following year’s tax bill.
AHFA programs for new construction. The AHFA Step Up down payment assistance program is available for new construction as well as resale — eligible property types include single-family homes and FHA-approved condominiums, including new construction. If you’re a first-time buyer, verify whether Step Up applies to your purchase before committing to the builder’s preferred lender. Not all builders’ preferred lenders are AHFA-approved. See the AHFA Programs Guide for details.
Rate Lock Strategy by Scenario
| Scenario | Recommended Approach |
|---|---|
| Production build, 6–8 month timeline, rate-stable environment | Float to 60 days out, then lock |
| Production build, 6–8 month timeline, rising-rate concern | Extended lock at 90–120 days; calculate lock fee vs. rate risk |
| Spec home, closing in 30–45 days | Standard lock, treat like resale |
| Custom build, 12–18 month timeline | Construction-to-perm; lock permanent rate at conversion |
| Builder offering permanent buydown | Compare APR to outside lender; run break-even at expected tenure |
Additional Resources
- Buying From a Builder in Baldwin County — contracts, design center, timelines, and warranties
- New Construction Buyer Checklist — stage-by-stage reference including financing milestones
- AHFA Programs Guide — down payment assistance available on new construction
- FHA vs. Conventional Calculator — compare loan types for your scenario
- Mortgage Payment Calculator — model payment at builder’s rate vs. outside lender
- Alabama Closing Cost Estimator — full closing cost budget including Alabama mortgage tax
Questions about the builder's incentive package or your financing options?
I can walk through the numbers with you before you commit to a preferred lender — and connect you with outside lenders who regularly close new construction loans in Baldwin County. Get in touch and I'll respond the same business day.
Get in Touch →This guide is provided for informational and educational purposes only. It does not constitute financial, legal, or tax advice. Loan products, rates, builder incentive programs, and AHFA program terms change frequently. Verify current terms directly with lenders, AHFA, and the applicable builder. Consult a licensed mortgage professional before any financing decision.
Milton Christ, REALTOR® | naf Cash Certified | Keller Williams Alabama Gulf Coast | AL License #172097
