If you have a plot in your preferred setting or are planning to build a home rather than buying an existing one, you would most likely require a construction loan.
Construction loans work differently compared to traditional loans. A construction loan generally refers to a short-term loan intended to cover the cost of building or renovating a home. It has some major differences from traditional mortgage loans or home loans.
Construction loans for renovations or remodels of a current home are called renovation or home improvement loans which involves major changes to an existing structure. Construction loans for the building of a completely new home will be very different from renovation related loans.
A construction loan can be used to buy land and build a house, or construct a home on land that you already own. You can also place a manufactured home on land with construction financing.
During the period of construction, you commonly make interest-only payments on the balance of the money you’ve drawn. The loan is designed to pay the contractors and subcontractors who build your home in regular monthly installments, usually based on how much of the work has been completed at each stage of construction. Once the work for that is finished, the loan is to be paid off or converted into a “permanent” loan, which works like any other traditional mortgage with a payment of principal and interest until it is paid off or you sell the home.
Generally, there are two types of construction loans.
Construction to permanent: You borrow to pay for construction. When you move in, the lender converts the loan balance into a permanent mortgage. It’s 2 loans in one deal.
Stand-alone construction: Your first loan pays for the construction and when you move in, you would get a mortgage to pay off the construction debt. It’s 2 separate loans.
The permanent mortgage is like any other mortgage. You can choose a fixed-rate or an adjustable-rate loan and specify the loan’s term, typically 15 years or 30 years. When you’re prepared, shop and compare mortgage rates. Many lenders would let you lock a maximum mortgage rate when construction would start. Lenders generally require a down payment of at least 20% of the expected amount of the permanent mortgage. Though some lenders would make exceptions.
HOW DRAWS WOULD BE PAID
|Standard Milestones for Construction Loan Draw Periods|
|DRAW TYPE||WORK USUALLY COMPLETED|
|Draw 1: The Foundation||Final plans for home, permits for building, preparation of land, completing foundation|
|Draw 2: The Rough framing||Walls and roof are framed, sub flooring completed, and interior home partitions finished|
|Draw 3: The Dry In||Preliminary roofing, wood siding if applicable, window installation and exterior doors affixed|
|Draw 4: The Rough In||Initial air conditioning components, electrical, plumbing. Tubs and showers are set, and insulation is added to walls|
|Draw 5: The Trim Out||Drywall, interior doors, cabinets, counter-tops added, interior trim and final flooring installed|
|Draw 6: The Substantial Completion||Exterior trim, gutters, water and sewer hooked up, finish plumbing and electric, carpeting, garage doors|
|Draw 7: The Retainage||All finish work completed|
If you are interested in knowing more about construction loans, have questions or want to see how it’s structured, join us on 10th OCT for 1 hour webinar where you can ask any question that you might have.