If you want to build or remodel your dream home, a construction loan can be a great way to finance it! But what exactly is a construction loan, and how does it work? We’ll break it down for you, step by step.
A construction loan is a specific type of loan used to pay for building or remodeling a property. Unlike traditional mortgage loans, which are for buying existing homes, construction loans cover costs like land, labor, materials and permits.
There are multiple types of construction loans, but some common ones include:
Choosing the right construction loan depends on your finances, timeline and future plans.
When looking for a construction loan, watch for special perks! For example, we offer rate locks for up to 18 months and the option to borrow up to 90% of your lot’s value while you prepare to build.
With a construction loan, the lender gives money as your project moves forward, and you only pay interest on the funds you use. It’s a short-term loan with a few important factors to consider.
How Do Construction Loans Work? 4 Factors to Consider:
Loan approval
First, you need to be pre-approved by a lender. They’ll check your credit, income and other financial information to make sure you can repay the loan. To be approved, you’ll likely need a credit score of 620 or higher and a debt-to-income ratio below 45%. You’ll also need to provide a budget, timeline and other details from your contractor. The more information you have ready, the better.
Like a regular mortgage, a construction loan usually requires a down payment of at least 20% when you close. Once you sign the papers, construction can begin!
Contact one of our knowledgeable mortgage lenders for a free consultation. There’s no obligation, and it’s a great way to find out how much you can borrow.
Money distribution
Unlike regular loans where you have all the money upfront, a construction loan provides funds in installments, or “draws.” Money goes to contractors and suppliers when specific tasks are done, such as when the foundation is finished or the walls are up.
Term length
Construction loan terms typically last from 12 to 18 months, but they can vary based on the lender and project. During this time, you’ll only pay interest, not the amount you borrowed.
It’s important to work closely with your lender during construction to stay on track with your timeline and budget. If construction takes longer than your loan term, you may need to ask your lender about an extension or refinancing options.
Completion
Once construction is done, you’ll either pay off the loan or change it into a permanent mortgage. If you change it, you’ll start making regular payments to pay off both the loan amount and the interest, like a regular mortgage.
A construction loan can be a great choice if you want to build a new home or tackle a remodel. By understanding how it works, you’ll be better prepared to manage your finances and complete your project.
Let’s nail down the perfect construction loan for you! Contact one of our helpful lenders to get pre-approved today.
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