Construction Loans

Construction loans are typically for custom built houses. Typically, the down payment is 20-30% of the loan amount. Since there is no collateral and lending institutions are taking a bigger risk, the underwriting criteria is strict compared to Regular Mortgages.

Construction loan is a short term loan providing funds to cover the cost of building or rehabilitating a home. The payments on a Construction loan sometimes start six to twenty four months after the loan is made. Depending upon the terms of the loan, it can be paid off in a lump sum or converted to a Regular Mortgage at the end of the term. The Construction-to-Permanent loan is a type of loan that converts to a permanent mortgage once the construction is completed.

Construction loans usually have a higher interest rate than the typical Mortgage Loans used for a new purchase. The loan funds are disbursed in installments as the construction work progresses until the house is complete.

Example: The cost to construct a house is $205,000. That is the approved amount for the Construction loan. The first 60,000 would be advanced for the the initial foundation work. Forty five days later, another 80,000 would be advanced for framing after the foundation work is completed. Similarly, after the framing is complete, 30,000 for drywall, another 15000 for plumbing and another 20,000 for electric work.

Certain government loans, such as the VA and USDA loans offer Construction Loans with 0% down payment for construction loans to qualified borrowers. A borrower can qualify for an FHA construction loan for as low as 3.5% down payment.

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