How Do Home Construction Loans Work?

By Shane | Build

Nov 19

What Are Home Construction Loans? 

Home Construction Loans allows a new home to be built through the term of construction. It is based on the time needed to build a home, and it usually ranges from 6 months to a year. Once your construction loan is approved, your lender will pay your builder every period, after work is completed. As soon as the home construction ends, your loan repayment begins.

Most first home buyers prefer having their home construction loan be combined with their standard mortgage plan, into something termed as a construction-to-permanent loan. This avoids the need to refinance after construction and go through 2 different closings.

How Do Home Construction Loans Work?

Your builder will make a draft on how much money is required to build your home. Your builder is required to break down the proposed costs into periods of work. Your lender then will pay your builder after each period. It is usually per month, once they have separately verified that the assigned work has been completed.

Building a home means you already take into consideration a piece of land or an area that is being developed. Considering this, most construction loans already include the price of the land along with the cost of construction.

The more complicated it is, it only means that construction loans come with more engagement of the lender compared to standard home loans. Lenders require to take a look at your plans and the estimated budget and schedule in building your home. They need to see your plans in order to determine how much money your loan requires, and as soon as your loan gets approved, the lender will pay the builder in periods that follow the progress of the construction.

The payment interval is arranged through a draw schedule that is determined between you, the lender, and the builder. In each phase of the construction, the lender will normally verify the construction progress prior to the release of additional funds.

When Do You Pay Your Home Construction Loan?

You can only make interest payments before the construction completes. Once the home is completed, the repayment of the original loan will begin. Repayment of the loan is considered to be like the payment of a standard mortgage plan s it comes with monthly payments based on the amortization schedule.

If in the case that the construction is builder-financed, the loan will be in the responsibility of the builder, and the buyer doesn’t need to pay any amount, not until the end of the construction.

Home Construction Loans could be the perfect choice for you to build your dream home. However, it also has its own risks, but if you are prepared for it and have additional funding that is available to support you when there are problems that come along the way.

On the other hand, if you are just looking for a place to live and don’t have emergency funding to deal with unexpected difficulties. If you are concerned about the process of building your home, then you might as well choose an existing home through the use of a conventional loan. You should carefully consider the benefits as well as the risks in order to make sure that you are making the right decision when it comes to building your dream home.

Author: Shane

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