What is a Construction Loan?

Home Construction Loans Fund Your Dreams

If you’re interested in taking out an individual construction loan to build the perfect home, there’s a few things you need to know. In the past, many builders funded homes using their own capital, then prospective buyers would purchase the homes using traditional mortgages. Today, many smaller builders have less access to capital, so the onus is often on the buyer to get a construction loan and mortgage. This is great in some ways, including that the buyer has more control over the project from its inception. Construction loans can, however, be complicated without the help of a skilled mortgage agent. If you’re interested in learning more about home construction loans, First Financial Bank – Bill Lavelle is here to help. We help clients in Columbus, Dublin, Powell, and Cleveland, OH, so let’s get started today.

Stand-Alone and Construction-to-Permanent Loans

There are two main types of construction loans: Stand-alone construction and construction to permanent.

Stand-alone construction loans fund the build of a home. Once construction is complete, then the buyer must get a new, permanent mortgage. The construction loan itself is less expensive than a traditional mortgage, which means a lower down payment. These are popular among our clients who have not sold their existing home yet, but plan to do so once construction is complete, freeing up new cash for the down payment on the permanent mortgage. The combination of a construction loan and a separate mortgage means the borrower will have two sets of closing costs. It also may mean he or she cannot lock in an interest rate for the permanent mortgage. In the months that a home is being built, mortgage rates can fluctuate quite a bit.

Construction-to-permanent loans, as you may have guessed, convert from a construction loan to a permanent mortgage once a home is complete. Construction-to-permanent loans are very popular with our clients because they have less paperwork and only one set of closing costs. If you choose a construction-to-permanent loan, you can usually lock in an interest rate when construction begins, rather than waiting until its completion. If you choose this type of construction loan, we can automatically convert your construction loan to a permanent mortgage, which means less paperwork and hassle for you. Typically, construction-to-permanent loans require at least 20% down payment.

Preparing for the Unexpected

When it comes to the construction of a new home, there are more surprises in store than buying an existing home. This means you’ll need to have enough savings available or flexibility in your loan to cover these unexpected costs. This way, you can easily adapt your plans as challenges arise or as you choose to make minor changes throughout the process.

Working with an experienced builder is of the utmost importance when you choose a construction loan. He or she can anticipate costs you may not have considered and will keep your home progressing on a tight schedule. Whichever lender funds your construction loan will also want to investigate your builder’s background to ensure he or she doesn’t have a history of complaints and has successfully completed several home construction projects.

Take the Next Step

If you’d like to learn more about home construction loans, our team would love to speak with you. If you’re interested in building the home of your dreams in Columbus, Dublin, Powell, or Cleveland, we have the local knowledge and lending expertise you deserve. Contact us to get started today.