Your guide to home construction loans

Published on Jul 01, 2021

Your guide to home construction loans

Building a new home can be exciting. Yet, new construction requires a lot of planning, and securing financing can be more difficult than with a traditional mortgage. That’s why we’re here to walk you through how to get a home construction loan, the types of loans available, and everything else you need to know to start building your dream home.

How do you get a construction loan?

In general, getting a construction loan is a similar process to obtaining a mortgage, but there are more factors involved. With a home mortgage, if you default on your loan, the bank can foreclose on your home and the house itself acts as collateral. A construction loan is considered higher risk because there is no such collateral. As such, these types of loans normally come with higher interest rates and some of the following requirements:

Prior to applying for a construction loan, you should meet with an architect, have your home plans and specifications, and determine the overall cost of the project so you know the size of the loan you will need. Lenders will want to see your project timeline, plans and budget, as well as your employment history, savings, income stability, credit score and DTI ratio.

Unlike purchasing an existing home, your costs are not fixed. Construction costs may increase as your project progresses and you’ll need to have extra funds available for contingencies during the build. Lenders will want to be sure that you are using a reputable builder, so they will want to make sure that your builder is properly vetted.

How is a construction loan different from a personal loan or mortgage? 

Construction loans are set up differently than other loans. They are typically high-interest loans given out over a short period of time. Typically, terms are for one year during which time the home must be built and a certificate of occupancy issued.

Additionally, construction loans are not given out as a lump sum like other loans. Instead, the bank pays out the money in stages as the building process progresses. As you request the bank to pay out funds, they may send a representative to check on the construction site. You are only obligated to repay interest on the funds drawn to date until construction is completed.

What types of construction loans are available? 

There are three main types of construction loans to consider:

As you get started on the journey of building your dream home, keep these tips in mind so you make the right decisions for your needs. If you’re not sure what kind of construction loan you need, our experienced home loan consultants can you make the right decision.