Thinking about building a new house or renovating an existing home? 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 Savings Institute Bank & Trust about construction loans.
How to 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 a Construction Loan vs. a Mortgage
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 or phases 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, banks, like Savings Institute, that offer construction loans 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 from the original construction loan (potentially with a different lender) after the house is built. Construction-only loans can also be attractive for those who already own a home and are building their next house.
Ready to apply for a construction loan in CT or RI?
Not every bank or credit union in Connecticut or Rhode Island 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 Savings Institute Bank & Trust, we care about our community and helping you to finance the house of your dreams. We even offer a Construction Concierge program with a dedicated individual that will be with you through every step of the construction loan process. View our loan rates and contact a mortgage consultant to learn more about how we can help you finance your dream home.