Understanding Home Construction Loans

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Building your dream home takes a lot of time and effort, but the end result is well worth it. Chief among the steps to building that home is obtaining a home construction loan, which differs from a traditional mortgage due to the fact that the home doesn’t yet exist as collateral. If you are considering new construction, take a moment to learn about the loan process.

Who Obtains The Loan

When it comes to new construction, there are two methods of obtaining a loan. The first is to finance it through the builder. This is a common method when working with a large home construction company, as these companies have access to a variety of financing options.

The second option is to obtain the loan yourself. This is a more difficult approach, but allows you to choose from smaller builders for your new home. This route is generally limited to those with a strong financial situation and good history, as the bank is taking a chance on an unsecured loan.

Length Of The Loan And Terms

The terms of a home construction loan are quite different from a traditional mortgage. Most such loans are set for no more than a year. These short-term loans are designed to provide for the construction phase and can be converted to a traditional home loan when construction is complete.

Home construction loans generally have a variable interest rate that will fluctuate somewhat throughout the term of the loan. Since the loan term is so short, this usually won’t be a major fluctuation, but it’s important to be aware of it as it may affect payment amounts. These payments, in most cases, are interest-only, which means they won’t chip away at the balance.

Construction And Completion

As construction proceeds on the home, the lender will provide funds as needed and check up periodically on the progress. Because of the short term on such loans, it’s important that construction takes place on schedule.

When the home is completed—on receipt of a certificate of occupancy and confirmation that all contractors have been paid—the loan will then be converted to a traditional mortgage.

Some lenders offer an all-in-one loan that encompasses the construction and the mortgage.

Building a home is a great opportunity to get exactly what you want.

Before you decide to take this route, learn all you can about the construction loan process.

Image Credit: @photovs via Twenty20

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