These loans are obtained through prequalification's and cover the cost of the home you are wanting to buy. These are the most common loans and most people have experienced this type of loan.
While the process for approval in both mortgage loans and construction loans is similar, they do have some differences.
Construction loans start out with a different process. The homeowner usually has found a piece of land they want to build on and have a land loan in place supporting the purchase of the land.
Then, the homeowner enters into a construction loan to finance the house during the build process. Some banks offer both loans and have options to roll the land loan into the construction loan, eliminating some fees and down payments on two loans.
The construction loan you close on the loan prior to construction starting. Which means you pay the closing costs and down payment upfront.
Then throughout the construction process, you will take draws on the loan. These draws are based on the percent complete of the build and are supplied by the builder. The bank holding the loan will do inspections to ensure the percent complete being reflected on the draw is accurate to the amount of construction complete. When they approve the draw amount they release payment to the builder.
During the process, the homeowner pays an interest payment on the amount that has been released during the draw process. Owner payments will increase during the build period based on the total funds that have been released on the loan.
Once construction is complete the loan then converts to a fixed mortgage loan. Some banks offer both loans, but usually, the mortgage is through a separate bank.
This process can be confusing and overwhelming, but having the right people in your team can make it a breeze. Experienced home builders can help you through this process and recommend lenders that they have relationships with.
If you have any questions on this process or want to learn more please email Bill, firstname.lastname@example.org, and put "Construction Loan Questions" in the subject line.
Want to learn more about the home build process and the steps involved? Click here to see all 11 steps.