Construction Loan Explained
A Construction Loan is a short-term loan used to finance the building of a new home or major renovation. Instead of receiving the full loan amount upfront, funds are released in stages as construction progresses.
How Construction Loans Work
Construction loans are typically interest-only during the build. As each phase of construction is completed, the lender releases funds (called “draws”) to the builder. Once the home is finished, the loan converts to a permanent mortgage or is refinanced.
Who Construction Loans Are For
- Borrowers building a custom home
- Homeowners doing major renovations
- Buyers tearing down and rebuilding
- Investors building new properties
- Borrowers wanting full control over design and features
What Lenders Look At
- Construction plans and blueprints
- Builder credentials and licensing
- Project timeline
- Cost breakdown and budget
- Appraisal based on completed value
- Credit score and down payment
Basic Requirements
- 680+ credit score (varies by lender)
- 5%–20% down payment
- Approved builder
- Detailed construction budget
- Appraisal based on “as-completed” value
- Reserves for cost overruns
Loan Structure
- Interest-only during construction
- Funds released in draws
- Inspections required before each draw
- Converts to a permanent loan or refinances after completion
- Short-term loan (usually 6–18 months)
Types of Construction Loans
- Construction-to-Permanent (One-Time Close)
- Construction-Only (Two-Time Close)
- Renovation Construction Loans
- Owner-Builder Loans (limited availability)
Property Types Allowed
- Single-family homes
- Custom homes
- Major renovations
- Tear-down and rebuild projects
- Some lenders allow 2–4 unit builds
Benefits
- Full control over design and build
- Interest-only during construction
- Converts to a long-term mortgage
- Ideal for custom homes and major renovations
- Flexible loan structures
Next Steps
If you’re planning to build or renovate a home, a Construction Loan may be the best option. Finalize your plans, choose a licensed builder, and review your construction budget before applying.
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