Construction Loans Basics- What You Need to Know

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Construction loans offer a simple and efficient way of financing the building of a residential property. Usually obtained by the prospective home owner, this type of loan is typically short term. It can be tough to get approval for this loan without any previous banking history. Rates are generally higher than rates on permanent mortgage loans- this is generally due to the lack of collateral.

There are two main types of construction loans:

  • Construction-to-permanent
  • Stand-alone-construction

When you apply for this type of loan, lenders will want details about the home’s size, materials used as well as all details relating to contactors and sub-contractors.

You will also need to provide proof that you will afford to make monthly loan payments during construction. It’s important for you to have adequate savings in order to be able to pay for unexpected costs.

Keep in mind that the lender will look into the builder’s credit standing.

How construction loans work:

Evaluate your financial capacity- you need to consider how much you can afford. If you can’t afford the loan, rather wait until you are more financially stable before applying.

Be prepared to put down a deposit of 20%- construction loans are considered highly risky, so it’s important that you have enough money for a deposit.

Find land, your house plans and a reputable builder- this will be very important, because the lender will need to trust that your builder is reputable and will therefore complete the job, while making sure that it’s a good quality job during the construction process.

Apply for the loan. The lender could pay out in four to six advances during construction. This is to monitor the building process and to make sure that the loan is spent on all the right building materials.

Make sure that you do thorough research before applying for construction loans.

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