A construction loan is used to pay for the construction of a home before it’s rolled into a standard mortgage on completion.
Getting a loan for a custom home comes with different requirements than traditional mortgage loans. It’s important to know how construction loans operate and what kind of prep should be done before applying for one. Being ready before applying for your loan will expedite the process and help it go smoothly.
What Are They?
A construction loan is a specialized loan that is used to pay for a new home as it is being built. This kind of loan is paid out in a very different way. During construction, draw payments will be made to the builder to cover the various stages of construction once completed. Draws mark important checkpoints in the building process. Interest accrues for the amount of the draws. You or your builder will make the interest-only monthly payments during construction until the home is completed and the loan is converted to a permanent mortgage.
Different Types
Construction-to-permanent loan
A construction-to-permanent loan is arguably the best type of construction loan. This automatically rolls the construction loan into a standard mortgage and can save you money due to only having a single set of closing costs. It also eases the process between construction and habitation.
Construction-only loan
A construction-only loan covers the cost of construction without being able to roll into a mortgage. This style of construction loan requires two separate sets of closing costs – for the construction loan and then the following mortgage – and forces the borrower to seek out a mortgage loan separately.
Important Things to Know
Obtaining a construction loan will require you to work with lenders who offer this special program. Many do not. And you will need to work with someone local that is comfortable with your builder. The builder will have to be approved by the lender and complete paperwork and documents. Many builders are already qualified by more than one construction to permanent program lender and can supply you with a list of those companies.
Another important factor is homeowners’ insurance. Even before the home is built, the construction itself should be insured and your lender will want this to be the case. Most builders will cover the risk of loss and the owner provides additional liability. Always check the contract and the builder/lender requirements upfront. This creates a safety net in case something goes wrong during the building process and the construction is totaled.
Design and Build Your Dream Home with Columbia Builders!
Columbia Builders is the home builder of choice in Howard County, offering homes in Ellicott City, Elkridge, Laurel, Columbia, Marriottsville, Fulton, Clarksville, Dayton, and Brookeville. No matter what the size and scope of your project, we have the skills, experience, and resources needed to bring your vision to life. We offer a level of customization that is truly unmatched and are committed to using materials and craftsmen of the highest quality, so you can trust that your new home is built to last. Columbia Builders was voted Best of Howard County 2020 for best home builder.
If you’re ready to invest in a home, built with your needs in mind, trust in us. Give Columbia Builders a call today at 410-730-0215 or use our contact form here. You can also keep up with us on Facebook, Twitter, Houzz, and YouTube, and don’t forget to check back on our blog for more tips and information!