What is a Construction Loan?

In a nutshell, a construction loan provides financing for the purchase, or payoff, of your lot and all construction costs of your new home. It is not a standard purchase or refinance loan.

The process starts just like any purchase loan; an application is taken, purchase agreements are signed, income and asset documents collected, title insurance and an appraisal are ordered. The difference begins at the closing of the loan.

On a purchase or refinance loan, all the funds are dispersed at closing and the transaction is completed. With a construction loan, the only funds dispersed at closing are funds to pay for, or payoff, the land and any deposits due to the builder. From this point on funds are dispersed to the builder only as work is completed.

During this construction process you would normally not have a fixed monthly payment on the loan. Normally you would be billed for just the interest, just on the funds you have used, not the whole loan amount. I say normally because all construction loan programs are different.

Construction loans come in two forms. A “Single” or “Construction-To-Permanent” (CTP) loan will not only provide the interim financing to build your home but will also “roll over” to your permanent 30 year mortgage. A “Two Time” or “Construction Only” loan will just provide the funds to complete the project. You must then refinance to the permanent loan.

With the Single/CTP loan you are guaranteed an end loan (provided construction is done within a stated time frame) and can usually lock in a rate or rate cap with this program. No such guarantees are given with the Two Time/Construction Only program. Your rate, even the commitment of an End/Permanent loan, are subject to your income, equity, assets, and credit score once the home is completed.

Construction loans are not offered by all mortgage companies. Even if a company offers a construction loan program there is no guarantee that your loan officer is experienced in this type of lending.

Make sure you work with someone that is experienced in construction lending and be clear on the type of financing you are being offered.

Please feel free to contact us if you have further questions.

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