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If you’re building a home, chances are you’ll need a loan to help with the finances of the project. You may not be able to pay the construction fees up front, and if you’re having difficulty getting a mortgage because you’re essentially asking the bank for a loan for something that doesn’t technically exist yet, a construction loan may be the best loan for you.

A construction loan is, essentially, a short-term loan used to pay for the costs of building a home. They are typically offered for a set term of 12 months, and the interest rates vary from 12-13% with all points rolled into the loan.

How Do I Qualify?

To qualify for a construction loan, there are a few areas of criteria you must meet, specifically because as the lenders, we tend to be leery of circumstances which can go awry during or after the construction process. To quality, the following standards should be met:

  • A qualified builder with an established reputation for building quality homes is involved;
  • The home value has been estimated by an appraiser, which will include the blue books, specs of the house, as well as the value of the land it is being built upon;
  • Detailed specifications provided to the lender, including floor plans, building material details, etc.;
  • Down payment, usually of around 20% as a minimum, which will ensure that you are invested in the project and can’t walk away from the deal if something goes wrong.

How Do They Work?

Once you’re approved for your construction loan, we will begin paying out the money agreed upon by both parties. Rather than giving it all at once, like a traditional loan, we will set up a schedule of draws instead. These draws are designated intervals for the builder to receive to continue the funding of the project. The number of draws will be negotiated between all parties involved before the approval of the loan. Once the home is built, the buyer will need to then get the end loan to pay off the construction loan.

As with any other loan, you have to pay interest on the money you borrow for the construction loan. They can be variable rate loans, or set up as interest only loans, meaning you only pay interest on the money you borrowed, rather than paying down a part of the principle loan balance. This can also be discussed during the loan process to determine which will be right for you.