If you’ve been searching for a home that meets all your wants and needs but aren’t finding the perfect fit, building a new home may be the answer.
Building a home is a fun but challenging project. With so many factors to consider—funding construction, finding a location, choosing a contractor, establishing a budget, picking out plans and features—there’s a lot to think about. With the right tools, it can be within reach.
What is a construction loan?
A construction loan is short-term financing that covers the cost of building a custom home or renovating an existing home. These funds can be used for all the costs related to the project, including permits, materials, labor, and other expenses.
How does a construction loan work?
First, you will apply for your construction loan with a Construction Loan Officer. The process is like a typical mortgage, evaluating your credit worthiness and ability to repay the loan. You will also give the Loan Officer detailed project plans, cost estimates, and builder information. The lender may also require that the builder be approved. If approved, your payment typically is interest only payments on the amount that’s been dispersed plus taxes and insurance.
Unlike a traditional mortgage that is paid in a lump sum, a construction loan disperses payments, also called draws, to your builder as building progresses. Draws are paid upon builder/client request. At each draw, your Loan Officer will check the progress of construction before releasing funds to the builder. Paying down the principal starts upon completion of your home with the start of your permanent financing.
Types of Construction Loans
Sometimes referred to as a one-time close loan, this construction-to-permanent loan will fund the construction process and then convert to a permanent mortgage upon completion of building. This loan has one application, a single qualification process, and one upfront set of closing costs and fees.
This loan will fund only the construction of your home. After your home is built, you’ll need to get a separate loan to refinance the construction loan into a mortgage. The new mortgage will have its own application, qualifications, terms, and closing costs.
Before you Break Ground
Building your home starts with a good foundation—literally and figuratively! Arm yourself with knowledge to help you make informed decisions before you begin and at every stage of the process.
- Understand your loan options, the rates and terms of those options, and the costs and fees.
- Secure the right financing from a trusted lender.
- Know your budget.
- Choose a reputable and professional builder.
- Understand the contract between you and your builder.