What is a Construction Loan?

When you go to purchase, build, or renovate a home, you’ll always need money to do so. Unless you plan paying upfront from your own pocket, you’ll probably be looking at loan options. A construction loan is one that gives you the money to pay for building costs and labor for a brand new constructed home, or renovation.

Construction Loan Specifics

Construction loans typically have a much shorter time period compared to conventional purchase loans. This is to help ensure the project moves along and doesn’t drag out or take too long. Since these loans are for shorter periods of time, they will have higher interest rates.

Lenders view a construction loan as a big risk. With traditional loans, the house you are purchasing can act as collateral if you default on your mortgage payments. With a construction loan, the house isn’t built yet, so that option isn’t available. Therefore, these loans will have higher interest rates.

Loan Payments

Loan payments for this type of loan are a little different than how you might pay a conventional mortgage loan. Most personal or conventional home loans are paid in a lump-sum, while a construction loan is paid in stages as parts of the construction project are completed. These payments and their due dates will most likely be detailed in the loan agreement when you sign with a lender.

What Can They Cover?

Construction loans cover different costs than a conventional purchase loan, which contributes to their shorter timeframe and higher interest rates. Some of the main parts that this type of loan can cover and pay for include:

• Building permits
• Land acquisition
• Construction materials
• Labor costs

Sometimes additional things like design or landscaping costs can also be included, but are not required by the loan.

Requirements

As we mentioned, with these types of loans, the time period is much shorter for the construction, as well as the life of the loan. When you apply for a construction loan, you will need to provide your lender with detailed plans, including your timeline and budget.

Your budget should include the estimated costs and expenses for each stage of the project. This will include both the costs of labor and materials, as well as additional requirements such as permits.

Some loans will include some reserve money for any unexpected expenses or changes wanted by the home purchaser. This allows for changes to be made if new plans are incorporated, or in case any mistakes are made.

Finding the Right Loan

When you begin a construction project for a home, you will most likely want to start by looking for a builder. You’ll first want to decide on a construction company or contractor that will take over the project. From there, you can ask the builders what they expect they will need, their proposed timeline, and whatever else you might need to know from them.

After this, you will need to prepare your plans and required documents for the lender, as they will be asking for those things when you meet with them. Until you have those things prepared first, a lender won’t be able to move forward with your loan.

Once you have all of these things in place, you can begin discussing things like start dates for the project!

Union Capital Mortgage Loans

If you need a loan to construct a home, reach out to Union Capital Mortgage today! Our mortgage loan officers are experienced with all types of loans and can help see you through the entire process from start to finish.

Visit our website or call (440) 585-5626 today!