Many prospective homeowners like the idea of building because rather than settling, because they get exactly what they want. Others like buying something new, because no one else has ever lived in it. No matter the reason, home building is an increasingly popular option for prospective homeowners. But how does the financing work?
The Construction Loan
Loans for home building are “home construction loans.” These typically require previous banking history and collateral, and are short-term loans (with a term of 1 year or less). They also require special guidelines and monitoring to ensure timely completion of a project, so your repayment period can begin.
To win approval for a construction loan, your lender will likely ask to see a construction timetable, budget, and detailed plans for the home. This is referred to as the loan’s “story.”
Construction to Permanent Residence
Once your home construction is complete (i.e., you receive a certificate of occupancy and fulfill your financial obligation to contractors), your loan liability rolls over into a mortgage, and you pay one set of closing costs. This is called “construction to permanent” financing. In recent years, the construction loan and home mortgage have been rolled together into a single 30-year loan.
Construction delays are a common part of homebuilding, as are hiccups in the delivery of material and labor. If pursuing a home construction loan, be sure to build allowances for these shortages into your construction timetable.
If you have further questions about home construction loans, talk to your lender. We’re here to help!