Financial

ALL YOU NEED TO KNOW ABOUT NEW CONSTRUCTION LOANS

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What is a New Construction Loan?

A construction loan is a high-interest, short-term loan used to finance the costs associated with building a home from the ground up. Funds will only be available as long as construction is ongoing, typically one year or less. Depending on the type of construction loan you have, you’ll be able to refinance it into a permanent, long-term mortgage or pay it off completely once construction is finished.

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How do they work?

Standard home mortgages and construction loans are both used to make you a homeowner, but they work in very distinct ways. Most notably, the lender will pay builders, not borrowers, in intervals called draws. Another determining factor for payments will be the construction phases, such as laying the foundation, installing plumbing, or adding the roof.

Before another draw is distributed, an inspector will arrive on-site to check building progress to ensure it’s on time. This will happen at every stage of construction. During this time, you’ll also be making interest-only payments based on the funds already used until construction is over.

Types of Construction Loans

1
Construction to Permanent Loan
Also known as a single close construction loan, and will convert to a standard mortgage once the building is completed. With this loan, you’ll only be required to submit one application and pay closing costs once. At closing, your mortgage rate will be negotiated and fixed.
2
Construction Only Loan
Will only cover the construction of the home. Because this loan is short-term, you will have to find a way to finance it once construction is over. But gives you time to shop for your mortgage.
3
End Loan
An end loan is a different way to refer to your mortgage. Once construction on your property is complete, you’ll have to pay off the end loan. To get an estimate of your payments, use a construction loan calculator.
4
Builder Financing
Some builders will offer builder’s financing. Because it is a greater risk for the builder, they may require a larger down payment. However, the builder will finance the upfront build costs and you will take out a final end loan.

HOW TO GET A NEW CONSTRUCTION LOAN

Even though the application for a construction loan may be similar to a standard home mortgage, a construction loan is much more complicated.
Here’s a brief step-by-step overview of the construction loan process:

Builders in developments often work with referral partners or an in-house lender and will offer discounts off closing costs, rate buy downs, or even basement finishes/fixtures for using their lender. Builders will use their own contracts, similar to a regular sales contract, but will include specific terms related to the specific home being built. As your REALTOR®, I will read through these contracts with you. Some builders will offer builder financing. This means the builder finances the build and you will close with a standard mortgage on the day of closing. Others will require you to finance your build by first purchasing the lot and your new construction loan would disperse payments to the builder throughout the build.

File Processing, Appraisal & More

Once you have an accepted purchase agreement/contract with the builder your lender will work with the builder to disperse appropriate draws to fund the build. During this time the lender will still also be doing things such as file compliance, appraisal, underwriting, and buyer approval. Lenders also cannot release final funds to close until they receive a final certificate of occupancy and proof construction is completed.

**If you are purchasing a spec/model home under construction. You will not need a new construction loan,
and would finance this with a standard mortgage pre-approval.

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