How Do Home Construction Loans Work?

A dream of building a home in Maine or New Hampshire that perfectly suits your needs and aspirations is a common one, but it requires a specific type of loan to accomplish. A construction loan is designed to pay for the building or remodeling of a property, from purchasing the land to the finished structure. Unlike a traditional mortgage loan, which is for buying an existing home, a construction loan covers costs such as the land or lot, labor, building materials, and necessary permits.

The initial term on a construction loan is up to 12 months, during which time a lender like Norway Savings Bank will release the funds when major milestones in the construction plan are reached. You can borrow up to 85% of the building acquisition cost or the home’s appraised value, whichever is lower, and even act as your own general contractor if you wish.

Construction loans come with benefits, of course, but there are also important things to remember as you consider your journey to a new home, vacation retreat, or addition. This article will provide you with that guidance, but first, let’s cover the types of construction loans:

Construction-to-Permanent Loans

This loan acts as a short-term construction loan that covers the costs of the building phase and then shifts into a traditional mortgage once the house is complete. This loan does not require a second closing, which would come with additional costs. You would typically choose between a fixed or adjustable rate and a term of 15 to 30 years.

Construction-Only Loans

This loan provides the funds necessary to build a home which you’ll repay in full at the end of the term with cash or a mortgage. It’s ideal for people who are building with the intention of reselling or who have limited funds to use as a down payment. These loans are also known as “two-time-close” loans as they require two separate closings: one for the construction and one for the mortgage. This type of loan can provide more flexibility in loan terms, but you’re likely to pay more overall with the two separate transactions.

Renovation Loans

This loan helps to pay for things like upgrading your kitchen, bedroom, or bathroom. A renovation loan is particularly appealing for individuals looking to purchase a home that requires repairs or renovations.

Owner-Builder Loans

These loans are construction-to-permanent or construction-only loans in which the borrower also acts in the capacity of the home builder.

Obtaining a construction loan involves pre-approval and architectural blueprints, a licensed builder, and a detailed timeline and budget. The pre-approval process can help
you understand how much you might be able to borrow and finalize the budget with your builder. Like a regular mortgage, a construction loan usually requires a down payment of at least 15% when you close at Norway Savings Bank The Norway Savings Bank team can help you choose the proper construction loan that suits your finances, timeline, and plans for the present and future.

Benefits of Construction Loans

• Financing a custom-built home allows you the flexibility to construct a dwelling that suits your needs and preferences.
• They can provide more flexibility in loan terms than a traditional loan.
• During the construction phase, payments are interest only.
• A new home can feature energy-efficient technology that can assist in lowering utility bills.
• Constructing a new home may increase your property’s value more than an equivalent home that’s older.

Challenges of Construction Loans

• Construction projects sometimes run over budget due to the unpredictability of material costs or unforeseen building challenges.
• Funds are released in stages, not all at once at the start of the project.
• Delays may extend your loan’s interest-only period which will increase your total cost.
• Design costs are not included in construction loans, which means a separate fee for any architect or interior designer you might want to use.
• Lenders will want to see a construction plan and detailed project outline and budget, which makes the process more involved than a typical mortgage.

Tips on Construction Loans

• Ensure you have a good credit score and a low debt-to-income ratio when seeking pre-approval for a construction loan.
• Choose a reputable, established builder with references.
• Work with your lender to evaluate your finances and select the construction loan type that best meets your needs.
• When working with your builder on a project plan, factor in unexpected expenses.
• If your financial situation worsens during the construction, you might not be able to qualify for a mortgage later on and might not be able to move into your new house.

A construction loan can be a great choice and a powerful tool for making your dream home become a reality. Understanding the nuances and following the guidance offered here can put you in a strong position to navigate the process successfully. With Norway Savings Bank, you’ll never have to go it alone. The NSB team can help you throughout the process – from getting prepared financially to hammering in the last nail and beyond. So when you’re ready, let us help you! Find the friendly, experienced NSB local lender in your area.

This article was written by NSB construction lending experts, not generated from artificial intelligence.