What are construction loans for housing?

You looked high and low and you can’t find a place you want to call home. So you decide that maybe you will have the perfect house built on land that you have already found or already own. When it comes time to finance a project, you can’t just take out a classic mortgage. Instead, you need to get so-called construction loans. The steps to obtain these funds are a bit more challenging than a classic mortgage.

Obtaining construction loans

When you buy a house, you deposit some money in advance as a deposit and the bank will use the property as collateral on the bill. However, if you are raising funds to build a house, there is no building that your lender can use the collateral for. To obtain one of these loans, you must have a certain bank history. There are also special guidelines, which vary from creditor to creditor, that govern how these funds are released.

In one of the first steps in raising funds to build your own house, you will need to present the “story” of the project. This is simply a set of detailed plans and a realistic budget that the lender sees. There should also be a timetable that will show how long the construction of the residence and the plan to spread the payments will take.

If the application is approved, you will not receive a check for the total amount. Instead, you will be issued so-called bank drafts. The schedule for drawing the proposal will follow the outline of the project schedule. The lender’s representative will also closely monitor the property to make sure the house is built according to plan. The creditor must approve the withdrawal of the funds from the bill of exchange by verifying that the progress has reached the point of the next payout.

After construction

The original maturity of the loan is usually one year. This does not necessarily mean that you have to come up with funds for your new house a year after its construction. This is simply a reasonable time to build a new property.

When the counterparties sign the release of the lien and a certificate of occupancy is issued, the debtor’s obligation is then converted into a traditional mortgage. The lender usually combines the terms of construction and the mortgage into one mortgage for 30 years and you pay the closing costs. The advantage is that with financing from construction to permanent financing, you only pay the closing costs once instead of twice.

Important information you should know

Construction loans are not common; make up a very small part of the percentage of mortgages. Because this type of financing poses a higher risk than a traditional mortgage, you will find that lenders often do not cover the full cost. They usually offer only up to 80 percent of the total. You will have to come up with the additional funds yourself. Some will allow you to use the land you own as equity to raise funds.

You need to be realistic when planning your schedule. Delays due to material availability and weather are common. Make sure you add more time to your plans to cover these issues.

If you plan to obtain construction loans, be sure to talk to your lender about the various options before submitting your application.

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