Construction Loans

A construction loan is a short-term loan used to finance the building of a new home. Unlike traditional mortgages, construction loans are typically disbursed in stages as construction progresses and often convert to a permanent mortgage once construction is complete.

Construction loans are disbursed in stages called 'draws' as construction progresses. Common draw stages include foundation completion, rough framing, roof and windows, interior finishing, and final completion. Each draw requires inspection and approval before funds are released.

Construction-to-permanent loans require one closing and automatically convert to a permanent mortgage. Construction-only loans require separate closings for construction and permanent financing, offering more flexibility but typically higher overall closing costs.

Construction loans typically require 20-25% down payment based on total project cost. Land value can count toward down payment, and some programs may offer lower down payments. Requirements vary by lender and program.

Construction loan terms typically include 6-12 months for the construction phase, with extensions possible if needed. The loan then converts to a 15-30 year permanent mortgage. The timeline should match your construction schedule.

Builders must typically be licensed and insured, have a proven track record, provide strong references, submit detailed construction plans, and demonstrate financial stability. The lender will verify all builder credentials before approval.

While owner-builder construction loans exist, they're less common and typically have stricter requirements. You'll need to prove your construction expertise, may need additional licenses, and might face higher down payment requirements. Most lenders prefer working with professional builders.

To handle cost overruns, include a 10-15% contingency in your initial budget. You may need to pay overages out of pocket, or the loan may be modified if significant. Careful planning and monitoring can help avoid overruns.