Building Your Dream Home with a Construction Loan
- Homebuying & Homeownership
- Andee Bryan
Ready to build the house of your dreams? While this can be a very exciting time in your life, you probably have a lot of questions too. Beyond what the home looks like, you need to understand if you can get a loan to build a house, how home building loans work, how much you will need to put down on a construction loan and more. Here are answers to the top questions we hear at C&N about construction loans.
How do construction loans work?
A construction loan is a short-term, variable-rate loan that’s used to pay for the building or renovating of a home while it’s being built and is paid to the builder as they complete the work. This is a popular home loan option for people looking to build a house or rehabilitate a house. A construction loan allows the contractor to get paid for supplies needed on the job to complete the work, and because home building loans are paid directly to the person doing the work, these can be taken out by either the future homeowner or the builder.
What does a construction loan cover?
A typical loan for house construction extends for one year and will cover:
- Labor and building materials
- Permits and fees
- Closing costs
Comparing Construction Loans vs Mortgages
One of the biggest differences between a mortgage and a construction loan is that the lender will pay the money out in draw periods, which are based on milestones of the home construction project. Construction lenders will usually require an inspection to be done at each of these stages before paying out the draw. Since there is nothing backing up the loan in case of default, construction lenders will take a good look into the architectural plans, budget, builder/contractors, materials used and home buyer’s personal finances to ensure they feel comfortable with the construction loan.
What is a construction to permanent loan?
The most popular type of construction financing is the construction-to-permanent loan which covers both the construction costs and mortgage. Some call this type of residential construction loan a two-in-one loan or a single-close construction loan because the homeowner will only have to pay for closing costs once and be able to roll in the costs of construction into a mortgage, whether that’s an FHA, VA or conventional mortgage. Notably, home buyers only have to pay for interest on the construction loan during the construction period, and once the building period is over, the home mortgage loan begins.
How does a construction-only loan work?
The other popular type of home building loan is a construction-only mortgage, also known as two-close construction loan. This is a loan taken out solely to pay for the cost of the construction project and typically doesn’t require as large of a down payment as a construction-to-permanent loan. This type of loan gives the home buyer the option to seek a separate home mortgage loan separate from the original construction loan (potentially with a different lender) after the house is built. And, construction-only loans can be attractive for those who already own a home and are building their next house.
Ready to apply for construction loan in PA or NY?
Not every bank or credit union in PA or NY offers new home or renovation construction loans. Before you draw up plans for the home of your dreams, it’s smart to get pre-qualified or pre-approved to find out how much you can afford to spend on construction and your mortgage. You can also get a general idea of your home mortgage budget with our Mortgage Loan Calculator. As with all big financial decisions, you’ll also want to make sure your credit is in order. If you’d like tips on improving your credit score, read our article. At C&N, we are “Your bank for a lifetime” and are here to help you when you’re building a new home. View our mortgage rates and contact a PA or NY Mortgage Lender in your county to learn more about how we can help you finance your dream home, or apply for a mortgage online.
Andee Bryan is a Mortgage Loan Originator at C&N covering Tioga County. She earned her Bachelor's of Science degree in Business Administration and Finance from Mansfield University in 2004. Prior to joining C&N, she spent seven years as the Associate Director for Student Life and Student Transition at Mansfield University, where she planned, promoted and executed programs and events to successfully engage, retain and transition students to the university.
Upon joining C&N in 2016 as a Business Analyst, she spearheaded the development, implementation and execution of C&N’s electronic imaging project. The following year, she accepted the position of Management Trainee, in which she worked within core banking areas to gain the skills, knowledge, and exposure necessary to successfully advance as a well-rounded employee within the bank.