Construction Financing

Most people do not have large sums of cto finance house construction.  If you need a construction loan in order to build, keep in mind that construction loans are very different from conventional home mortgages.

Key Differences between a Construction Loan and a Conventional Home Mortgage:

► The bank assumes more risk if the only asset is land owned by the applicant.  Banks are lending out money based upon an estimated value of the completed house, the reputation of the builder and the hope that the house is completed on time. 

► Construction loans typically require interest-only payments during construction and become due when the project is completed; that is, when the house has its certificate of occupancy. 

► Construction loans are usually variable-rate loans priced at a spread to the prime rate or some other short-term interest rate. You, the contractor and the lender establish a draw schedule based on stages of construction, and interest is charged on the amount of money disbursed to date.

► Many homeowners use construction-to-permanent financing programs where the construction loan is converted to a conventional mortgage with the newly constructed house as collateral.


Below are Some Tips to Apply for a Loan:

Know your options.  There are choices between fixed and variable rates.  There are also loans of different time periods.  Due diligence will save you hundreds of dollars. 

Get pre-qualified for a loan. This will help to determine if the requested loan amount is within your budget

Be very specific and detailed.  The lender needs to know what exactly you want to accomplish, why you want to do it, and how you intend to accomplish it.  Then he can recommend a program and approve your loan.

Factor interest reserve and contingency funds into the cost of building your new home.  Planning ahead for delays and cost overruns is important to create a budget.

Shop around. Most banks offer loans, but not choices. One way to get different choices is to go shopping to every bank in town. This takes time but is normally worth the effort.  Call your local banks and ask for the construction loan department or a construction loan officer. Ask friends and family about their banking loan experiences.

Make sure the construction lender is experienced.  As construction loans do differ from conventional home mortagages, you will find the process much smoother if you work with a lender who has a history of providing construction loans to for resedential home construction.

Submit your loan application with all the details clearly explained and verifiable.  A well prepared and documented application will leave a favorable impression with your prospective lender and speed up the application process.

Enter into a written contract with a builder/contractor if you are not doing all the work yourself.    (See our insurance and legal assistance page for more details).

Get construction insurance. There are three types of insurance needed to build. All banks require the first two insurances, course of construction and general liability. Workman's compensation is only required if your builder has employees. If your builder tells you he is not required to provide any insurance whatsoever, he is most likely correct because it is not a law to have insurance to build a house. This requirement is set forth by the bank. So make sure you hire a reputable builder with insurance, it will help your construction loan close much faster.

Ask your loan officer to provide you a copy of the estimated construction loan budget.  You will want to make sure that what the construction lender is using as its construction loan budget is consistent with your budget and what has been worked out with between you and the home builder.

Make sure your loan officer has structured your construction loan properly. Structuring construction loans for approval is vitally important and is the last thing on most customers’ minds. Common poorly structured loan scenarios include: