In today’s episode Sean asks the question how a construction loan works and how do you start the process of building your dream house.
This episode will share the details of the process and best practices for making a choice in your loan choice for building that dream home.
What Is a Construction Loan?
Construction loans are short-term loans specifically designed to finance the cost to build a home. They typically have terms of 12 months or less, strict approval conditions, and require a detailed schedule of your construction plans.
Rather than getting a loan to build a house and then a mortgage on the finished home, you could apply for a construction-to-permanent loan. In this case, the construction loan gets rolled into a traditional mortgage once the house has been built and a certificate of occupancy has been issued.
How Do Construction Loans Work?
As with traditional mortgages, homeowners looking for new construction loans must go through an application process with a lender to qualify.
Unlike traditional financing where you receive the total loan amount upfront, the lender will disperse the construction loan to you in stages — generally, a number of disbursements — during the construction period. If you haven’t already purchased land, your construction loan could include funds to cover your land acquisition cost as well.
Most construction loans will have a variable interest rate and you’ll be required to pay only the interest on the funds disbursed during the construction phase. If you’re paying rent or a mortgage on a separate home to live in while your new house is being built, make sure that you can afford both these monthly payments.
If you have a construction-to-permanent loan, it will be converted to a permanent loan once your new home is ready for occupancy. If you have a traditional construction loan, you’ll have to apply for a new mortgage on your house once it’s been completed.
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