Home construction loans are used to finance the construction of a new residential property. This could include building a home from scratch on purchased land or major renovations and additions to an existing property.
Instead of receiving a lump sum at closing, the loan funds are typically disbursed in stages or "draws" as construction milestones are met. These stages may include clearing and preparing the land, pouring the foundation, completing the framing, installing major systems like plumbing and electrical, and finishing interior work.
Once construction is complete, the construction loan usually converts into a traditional mortgage loan. This process may involve refinancing the construction loan into a mortgage with a longer repayment term and regular principal and interest payments.
Lenders may have stricter requirements for construction loans compared to traditional mortgages. Borrowers may need to demonstrate a solid credit history, sufficient income, and detailed plans for the construction project, including building permits and construction timelines.
Typically, these loans offer multi-feature security, ensuring comprehensive coverage for the entire construction project.
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