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Construction Loans - Laying a Foundation for Your Home

May 01, 2017

You’ve been browsing the Internet for homes, driving all over town on what should be lazy Saturdays and Sundays to check out open houses, but you still haven’t seen any houses that fit your needs. A thought crosses your mind: What if we just picked out a plot of land and BUILT our dream home?  
 
While applying for and closing on a construction loan is a different process than getting a traditional mortgage, you’re in luck— the team at First Security Bank is here to help.  We hear some common questions about construction loans, and are happy to share the answers:
 
Is Applying for a Construction Loan More Difficult Than Applying for a Traditional Home Loan?
There are more steps to the process, but we make it as simple as possible. A trusted lender will require detailed specifications, including floor plans, materials to be used in the home, a comprehensive budget, a realistic time frame for construction, and proof that a qualified builder will be involved in the construction of your home.
 
What’s the Lifespan of a Construction Loan?
A traditional home loan is typically a 15 or 30-year mortgage on an existing home, where the borrower makes principal and interest payments for the life of the loan. A construction loan, on the other hand, is underwritten to last for the length of time it takes to build the home, typically a year or less, and it basically gives the borrower a line of credit that lasts until the home is built.
 
How Do Construction Loan Payments Work?
Construction loans are often interest-only, meaning you will make payments only on the money that has been disbursed to you by the lender, and your necessary monthly payments will increase as you use more of your line of credit with your lender. Since a construction loan is riskier than a traditional mortgage, interest rates might be higher.
 
How Much Money Will I Need to Put Down on a Construction Loan?
Typically, 20% is the smallest amount you can put down to receive a construction loan, though some cases require that borrowers put down as much as 25%, as insurance against borrowers walking away from a construction project before its completion.
 
How Does a Construction Loan Pay Out?
Construction loans pay out through draws, designated intervals at which the builder receives funds from the bank to continue with the project. For example, the builder may get the first 10% when the loan closes, and the next 10% after the foundation is poured, then after the house is framed, and so on until the house is complete. The number of these draws is agreed upon before construction with the bank, the buyer, and the builder, and banks will often inspect the project at various stages of the building process before releasing the next draw.
 
Will I Also Need a Mortgage?
Probably. If you’re financing construction and expect to have a mortgage on the final product, the mortgage will be used to pay off the construction loan.
 
Will I need a Traditional Home Loan in addition to the Construction Loan?
You can, though the answer largely depends on how flexible you want to be during the construction process and how confident you are in your builder to keep your project on-budget.
 
Regardless of whether you choose to buy or build your home, we at First Security Bank are here to help you make the right decisions for yourself, your family, and your future. Contact us today for more information on how we can help you obtain a construction or traditional home loan.

Member FDIC Equal Housing Lender
 
 

Posted in: construction, home, loans, mortgage