Understanding the Ins and Outs of a New Home Construction LoanUnlike getting a home mortgage for the purchase of a pre-existing property, financing the building of a new custom home can involve a couple of different components. One, for instance, is that a construction loan will typically be issued for a time period of twelve months or less. During this time, the borrower may only be required to make interest payments. Then, once the home has been completed, this loan could be rolled into a long-term mortgage.

Because there are more variables (as versus with the financing of an existing home), a construction loan may be somewhat more difficult to qualify for. In addition, due to the added risk that the lender is taking on (such as no collateral), this type of loan may also come with a higher interest rate.

Once a borrower has been approved for a construction loan, it is possible to draw money for the funding of each phase of the home building project. However, prior to releasing the funds to the borrower, it is possible that the lender may verify the building process in order to ensure that both the time line, and the budget, are remaining in-tact.

Some items that can be advantageous for a borrower is to have a large down payment and / or an excellent credit score. In addition to the home buyer having to qualify for a new home construction loan, oftentimes the builder will also be subject to a credit and a background check. So, it is important that you choose to work with a good, quality builder that also has a great reputation.

If you’re considering turning the dream home in your mind into a reality, contact us for more information on how the process works, and what you can anticipate going forward with the project.