Progressive Disbursements
Construction loans disburse funds in phases, with payments made directly to contractors and suppliers as work is completed.
Build with clarity
What is a Construction Loan?
A construction loan is a specialized financial product designed to provide funding for the construction or renovation of a residential property. Unlike a traditional mortgage that provides a lump-sum payment for an existing home purchase, a construction loan provides financing in stages as the construction project progresses. Here's a closer look at the key features of construction loans:
Interest-Only Period
During the construction phase, borrowers typically make interest-only payments on the loan, which helps manage costs.
Conversion to Mortgage
Once construction is complete, the loan can be converted into a traditional mortgage, allowing borrowers to start making principal and interest payments.
Know the difference
Construction Loans vs. Traditional Mortgages
Construction loans differ significantly from traditional mortgages. Here's a comparison to help you understand the distinctions:
| Key Difference | Construction Loans | Traditional Mortgages |
|---|---|---|
| Purpose | Exclusively for building or renovating homes. | For buying existing homes. |
| Payment Structure | Progressive disbursements as work is completed. | A lump-sum payment at closing. |
| Interest Payments | Typically interest-only payments during construction. | Principal and interest payments from the start. |
| Appraisal | Considers the property's projected value upon completion. | Requires an appraisal of the existing property's value. |
| Loan Conversion | Can be converted into a permanent mortgage. | Does not go through a conversion process. |
Swipe horizontally to compare both loan types.
From plan to permanence
How Do Construction Loans Work?
- 01
Application
Borrowers apply for the construction loan, providing detailed plans, budgets, and estimates for the project.
- 02
Approval and Underwriting
Lenders review the application, evaluating the borrower's creditworthiness, project feasibility, and budget.
- 03
Loan Terms
Borrowers agree to loan terms, including interest rates, repayment schedule, and disbursement plan.
- 04
Progress Payments
As construction progresses, lenders make payments directly to contractors and suppliers.
- 05
Loan Conversion
Upon project completion, the construction loan is converted into a permanent mortgage.
Choose your structure
Types of Construction Loans
Construction-to-Permanent Loan
This common type combines the construction and permanent mortgage into one loan, simplifying the process.
Stand-Alone Construction Loan
In this option, borrowers secure a separate construction loan and later refinance it into a permanent mortgage.
Renovation Construction Loan
Ideal for major home renovations, this loan covers both the cost of purchase or refinance and renovation.
Prepare to apply
Construction Loan Requirements
To qualify for a construction loan, borrowers typically need to meet certain criteria:
Strong Credit
Lenders often require a good credit score to approve a construction loan.
Detailed Plans
Detailed construction plans, budgets, and project timelines are essential.
Down Payment
A down payment or equity in the project is typically required.
Income Verification
Lenders may request income documentation to ensure repayment capacity.
Experienced Contractor
Working with a qualified, licensed contractor is usually a requirement.
Now that you have a comprehensive understanding of construction loans, you're better equipped to embark on your journey to financing and building your dream home. For personalized guidance and loan options, contact us today.
Construction lending guidance