A construction loan provides financing to build a new home, with funds released in stages as construction progresses. Unlike a traditional mortgage used to purchase an existing home, construction financing is designed around the building process and the costs associated with completing the home.
During construction, funds are typically released through a series of draws as work is completed. Borrowers generally make payments based on the funds that have been disbursed rather than the entire loan amount.
At @Home Mortgage, we also offer a one-time-close construction loan option for qualified borrowers. This allows the construction financing and permanent mortgage to be arranged in a single closing, so you don't have to obtain a separate mortgage after construction is complete.
Construction financing works differently from a traditional mortgage because the home is being built rather than purchased in its completed condition. The loan is based on the construction plans, budget, builder information, and the expected value of the home when construction is complete.
As construction progresses, funds are released in stages, often called draws, to pay for completed work. The property is inspected throughout the construction process before additional funds are released.
With a one-time-close construction loan, the construction financing and permanent mortgage are arranged at the beginning of the process. Once construction is complete and the required conditions are satisfied, the loan transitions to permanent financing without requiring the borrower to apply for and close on an entirely new mortgage.
Construction financing can be structured in different ways depending on the loan program and the needs of the borrower.
One-Time-Close Construction Loan: A one-time-close construction loan combines the construction financing and permanent mortgage into a single loan closing. This can simplify the process by eliminating the need to apply for and close on a separate mortgage after the home is completed.
Stand-Alone Construction Loan: A stand-alone construction loan provides financing during the building phase. Once construction is complete, the borrower obtains separate permanent mortgage financing to pay off the construction loan.
Construction loans have additional requirements because the lender is financing a home that has not yet been completed. Requirements vary by loan program, but borrowers can generally expect the lender to review both their qualifications and the details of the construction project.
Borrower Qualification: Credit, income, assets, debts, and overall ability to qualify for the mortgage are reviewed based on the guidelines of the construction loan program.
Construction Plans & Budget: Detailed building plans, specifications, cost estimates, and a construction budget are typically required before the loan can be finalized.
Builder Approval: The builder or contractor may need to meet certain lender requirements and provide documentation about their experience, licensing, insurance, and the construction project.
Down Payment or Equity: Depending on the loan program, a down payment or equity contribution may be required. In some situations, equity in land already owned may be considered as part of the transaction.
Appraisal: The appraisal generally considers the expected value of the completed home based on the plans, specifications, and proposed construction.
Because construction financing has more moving pieces than financing an existing home, getting started early can help identify the loan program and documentation needed before construction begins.
Let’s talk about your plans, budget, and construction financing options so you can understand what to expect before you begin.
