Online Calculator | What Is A Home Construction Loan?

What Is A Home Construction Loan?

A home construction loan typically covers construction costs, the completed project, or a combination construction and permanent mortgage plan. The borrower will need to do their homework in deciding which method best suits their needs.

HOME BUYERS

Purchasers tend to seek traditional home mortgages from lenders when buying directly from the builder. A traditional mortgage uses the equity of the home and property as a guarantee of the loan.

The buyer has two options when obtaining financing to construct a home. One is to obtain a construction home loan for the period of construction, normally 6 months to one year, followed up by a permanent mortgage. The difficulty with this lies in having to hunt down two separate lenders, deal with two variable interest rates and pay two closing costs. The hidden jewel is that saving a tremendous amount of money is possible by securing better individual interest rates.

Combination loans offer the best of both worlds. They cover the construction costs and become the permanent mortgage once the project is complete. This type of loan removes the ability to shop around for the best interest rates, so it is best to get quotes before deciding which option is best.

BUILDERS

Home builders and neighborhood developers are in the business to make and sell homes. They are able to secure loans to cover most construction costs. Although lenders will loan up to ninety percent of new construction costs, builders and developers are required to add the remaining costs as an investment to the project. It is a proven way to help ensure loan repayment.

RISK MANAGEMENT

These loans are tightly managed to ensure the project makes it to completion. Funds are held in an account and the borrower may draw amounts as needed to pay for contractor fees and materials during construction. Some lenders allow online draws, but many want paperwork to cross their desk to ensure proper use of all monies. Periodic inspections ensure that the work is progressing on schedule.

Other methods of risk reduction include environmental and soil inspection, appraisals of materials and ensuring adherence to industry standards during all phases of construction. Making sure that all workers are duly compensated can save a project from the legal binds of liens.

There is a home construction loan that can conform to the needs of most home buyers and builders. Keeping the project needs and budget in mind when checking out the various options will guarantee a finished and affordable new home for all.

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