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 are specifically designed to cover a wide range of costs associated with building a new home or undertaking significant renovations. Unlike conventional purchase loans, which are typically used to finance the cost of an existing property, construction loans cater to the unique financial needs of the construction process. This is one reason why construction loans generally have shorter timeframes and higher interest rates. Some of the main expenses that this type of loan can cover include:

1. Building Permits: These permits are essential for ensuring that your construction project complies with local regulations and building codes. Without them, you could face significant fines or even be forced to halt your project. Construction loans often cover the costs associated with obtaining these crucial permits, which is the first step in starting your construction.
2. Land Acquisition: Whether you’re purchasing a vacant lot on which to build your dream home or buying a property that will undergo extensive renovations, the cost of land can be substantial. Construction loans can help finance this purchase, enabling you to secure the ideal location for your project. This aspect of the loan is vital, especially if you need to buy the land before beginning the building process.
3. Construction Materials: These materials form the backbone of your project, ranging from foundational elements like concrete and steel to more visible components like lumber, windows, and roofing materials. The ability to finance these essential items ensures that your project can move forward without delays caused by funding shortfalls. Having the right materials at the right time is critical to keeping your construction on schedule.
4. Labor Costs: Paying for skilled labor is one of the largest expenses in any construction project, whether it involves builders, electricians, plumbers, or other specialized contractors. By including labor costs in your construction loan, you can ensure that you have the funds necessary to hire qualified professionals to bring your project to life. Covering labor costs is essential for maintaining the quality and pace of your construction.
5. Design Fees: Some construction loans also offer the flexibility to cover additional expenses such as design fees. If you’re working with an architect or a designer to create a custom home, the loan might include the cost of their services. This allows you to integrate professional design elements that enhance the overall value and appeal of your project.
6. Landscaping Costs: Landscaping can significantly enhance the aesthetic appeal and value of your property. In some cases, construction loans may cover these costs, allowing you to create an outdoor space that complements your new or renovated home. While not always required, including landscaping in your construction budget can complete the vision for your property.

Overall, construction loans are designed to provide comprehensive financial support for a wide range of construction-related expenses, making them an invaluable tool for anyone looking to build or renovate a property. This extensive coverage ensures that all critical aspects of the project are financed, allowing you to focus on the construction process without the stress of managing multiple funding sources.

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 has the Best Loan Rates

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!