What to Know about Getting a Construction Loan

[fa icon="calendar"] May 10, 2021 / by Home Services Expert

custom home under construction_685166422If you are starting the new home construction process, one of the key issues will be financing of your home building project. If you're doing a major remodel, you will run into the same issue: a need for financing. Depending on the details of your particular project, you may find yourself in need of a construction loan.

It’s helpful to have an overview of your options, so we turned to Nerd Wallet for details regarding construction loans for new homes and remodeling projects. Read below to learn what a construction loan is, what it is used for and where to get one:


What is a construction loan?

"Construction loans are shorter term, higher interest rate mortgages that cover the cost of building or rehabilitating a house. The lender pays a construction loan to the contractor — not the borrower — in installments as building milestones are achieved. Once building is complete, home construction loans are either converted to permanent mortgages or paid in full."


What does a construction loan cover?

"Every project is different, but in general, a construction loan pays for:

  • Plans, permits and fees.
  • Labor and materials.
  • Closing costs.
  • Contingency reserves (in case the project costs more than estimated).
  • Interest reserves (if you don’t want to make interest payments during building)."

How do construction loans work?

New construction loan

"When you borrow money to build a house, there’s no collateral to back up the loan the way there is in a traditional mortgage — at least not yet. This makes lenders nervous, so you have to jump through some additional hoops before they’ll fork over the cash. Expect a thorough inspection of the architectural plans and your builder, as well as your finances.

Disbursement of a construction loan also works differently from with a traditional loan. Instead of transferring a lump sum, lenders pay home construction loans to the builder in installments, called "draws." Each draw coincides with an important phase of the project, such as pouring the foundation, framing and finishing work."


Home remodel loans

"If your dream house needs a lot of TLC, a renovation construction loan lets you wrap upgrade and repair costs into your permanent mortgage, says Sean Faries, CEO of Land Gorilla, a software company for construction lenders based in San Luis Obispo, California.

Common renovation loan programs include Fannie Mae’s HomeStyle Renovation Mortgage, Freddie Mac’s CHOICERenovation loan, the FHA’s 203(k) loan and the USDA’s Single Family Housing Guaranteed Loan Program.

Like a typical construction loan, the amount you can borrow for a renovation depends on an appraiser’s estimate of value once repairs and upgrades are complete. The lender still needs to approve your contractor and renovation plans, and it still pays the money in installments."


What is the required down payment for a construction loan?

"A 20% to 30% down payment is typically required for new construction, but some renovation loan programs may allow less. For example, the FHA 203(k) program allows down payments as low as 3.5%."

Read the full article on Nerd Wallet Here.


How to Get a Construction Loan:

At Experts In Your Home, we offer construction loan financing with our partners. If you are attempting to secure a construction loan through a mortgage broker you will have to find out which ones provide a construction loan product, as not all mortgage brokers do. Regardless of where you choose to get your new home or remodeling financing from, our Experts can help you end up with your dream home. Give us a call or contact us online today!

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