Construction Loans
Mortgage loans designed to finance the build of a new home or the renovation of an existing home.
In a Nutshell
What are Construction Loans?
Construction loans are also intended for use in renovation projects where an existing home is undergoing construction for a large and often high-cost remodel.
These loans function differently than a traditional mortgage in that funds are dispersed in batches as construction progresses, rather than in one lump sum as they are when purchasing a new home. Loan disbursements are reviewed and approved by the lender as milestones are achieved and documentation is submitted showing detailed costs of the project as it continues moving forward.
What to Know Going In
Loan Requirements
Perhaps the biggest difference between a construction loan and a typical mortgage is a construction loan’s short-term nature. Unlike traditional mortgages that last a period of 15, 20 or 30 years, construction loans typically span a period of only 12-24 months. At the end of the construction period when the home is fully built or the renovation is complete, these loans transition to a permanent mortgage that spans the length of a regular mortgage loan.
In addition to their shortened lifespan, construction loans typically come with a higher interest rate than a traditional mortgage might for the same borrower. These loans are considered riskier than others because, in instances of new construction, there is no existing home to use as collateral in underwriting the loan. Therefore, construction loans are typically more expensive and can involve heightened requirements for approval.
It’s important to note that unlike regular mortgages that only require payments once the loan has been funded, construction loans require payments to be made on a regular basis as soon as disbursements begin.
The Upside
Benefits of Construction Loans
How to Determine if a Construction Loan is Right For You
Meet with a mortgage advisor early in the process of looking to build or renovate a home to help solidify the right loan option for your situation. We’re here to help determine the type of loan that’s best for you.