What kind of projects are best suited for a construction loan?
Whether you’re a first-time homebuyer or an experienced homeowner, a construction loan can be as unique as the project you’re financing. Some projects that are good candidates for a construction loan include:
New home construction:
- A new home purchase where the builder requires payment in installments as the home is being completed
- Building a home on a lot you already own
Home renovations:
- A purchase of an existing home that requires renovation
- Renovations to your current home as part of a mortgage refinance that includes your existing mortgage and construction costs
Apply Today, Risk-Free
Designed to Your Specifications
You can design your own construction loan with Lendmore Capital. It is essential that your lender, your contractor, and you form a strong partnership when building your dream home. Building projects will be smoother and less stressful this way. Therefore, don’t delay building your dream home and talk to one of our experienced mortgage professionals today.
How Do Construction Loans Work?
The interest rates on construction loans are usually variable, moving up and down with the prime rate. Rates on construction loans are typically higher than rates on traditional mortgage loans. As collateral for a traditional mortgage, your home may be seized by the lender if you default on your payments. Home construction loans do not have this option, so lenders tend to view them as higher risk loans.
You should provide a construction timeline, detailed plans, and a realistic budget to the lender because construction loans are so short-term and dependent on the completion of the project.
After approval, the borrower is placed on a draft or draw schedule that corresponds to the stages of the project’s construction, and will typically be expected to pay only interest during the construction phase. In contrast to personal loans that make a lump-sum payment, the lender pays out the money over time as the work progresses.
The drawings are usually held when major milestones are reached – for instance, when the foundation is laid or framing begins. The borrower is usually only responsible for reimbursing interest on funds drawn until the construction is complete.
During construction, an appraiser or inspector is brought in by the lender to check the house. Lenders make additional payments to the contractor, known as draws, if approved by the appraiser. You can expect between four and six inspections during the construction process.
The borrower might be able to convert the construction loan into a traditional mortgage once the home is constructed, depending on the type of construction loan. Such loans are called construction-to-permanent loans. The borrower may have to obtain a separate mortgage to pay off the construction loan if the loan is only for the construction phase.