Getting a Loan for New Home Construction

by Greg Cryns

            
When you’re ready to build a new home, you’ll need to secure financing.  When applying for a loan for new construction, you probably have many questions about the process and the best way to go about it.

            The first thing you need to consider is purchasing land.  If you already own land, you won’t have to worry.  But if you need to purchase land and then put construction on it you may need to get two loans. One loan is for the actual property and one is for the 

home that will be built on it.  In some cases you can get a loan that covers both.  Once you’ve secured a piece of property, you’ll apply for a construction loan. 

It’s important that you know what’s expected of you with a new home construction loan. This loan is different from a traditional mortgage.

            In order to be approved for a loan, you have to have a complete plan.  You need to be able to explain how much your home will cost to construct or renovate and what the value will be once it’s complete.

            Unlike a traditional mortgage, construction loans are dispersed a little at a time to the contractor.  The amount of money corresponds with benchmarks in the schedule that’s set up with the construction company.

            Throughout the process, the financial institution that’s backing your loan will send independent inspectors to check on the progress of your home.  This helps them to guarantee that the work is being done properly and that they’re financing a quality home.

            The interest rate on a construction loan is often higher than a traditional mortgage.  The interest is also adjustable.  However, because a construction loan is relatively short-term, the interest doesn’t add up to as much as it would on a 30-year term.

            Once the construction of your home is complete, you’ll begin to pay back the construction loan.  Most people at this point convert their construction loan into a traditional mortgage. 

Some loans are even designed to convert automatically so that you only have to close one time on the loan.  To get a construction loan you may be able to apply to a traditional bank that also handles mortgages. 

However, some people choose to work with separate financial institutions for the construction loan and the mortgage.  The best thing to do is choose a plan that gives you the lowest interest rate and the best terms for your budget.

 

Greg Cryns is the owner of Flat Fee Real Estate Guide - http://www.flatfeerealestateguide.com