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How Do Home Construction Loans Work?

If you’re planning on constructing a brand new home at Park Grove, then you have definitely considered that you will probably need some sort of financing to get the project up and running to the point of conclusion. The process of financing a brand new home through construction loans at Park Grove is very different from financing a pre-construction or an already completed house.

Home construction loans

A home construction loan is a form of financing that is charged a higher interest than a conventional mortgage loan. It is also available for a short duration usually one year. It provides the funds necessary to build your dream home at Park Grove.

Some of the conditions associated with home construction loans is that the property must be completed within the duration, of the loan, which as we mentioned earlier, is around 1 year.

Mortgage lenders usually do not provide mortgages for home construction but would rather provide you with the shorter duration home construction loan.

The financing institution will base the home construction loan amount of your Park Grove home on the projected value of the home once it has attained completion. Compare this to the case where a conventional mortgage is based on the current market value of the home when the borrower approaches the mortgage lender. So the factors that are considered for mortgages include the current market value of the home, the condition of the home, and the recent sales of property of comparable homes within the area.

Another differentiating factor you should be aware of is that lenders pay out home construction loans in phases and not in a lump sum. The interest due on home construction loans accrues only when the borrower makes a withdrawal.

When applying for a home construction loan for your Park Grove residence, you will need to avail a builder’s contract and a schedule of the construction phases. A comprehensive cost budget will also be required for each construction item and an attached time frame


Types of home construction loans

Construction to permanent loan

This is a type of home construction loan that is repayable as a mortgage once the home construction is complete. So when applying for it for your Park Grove residence the financial institution will provide the funds in phases as the project continues and once it is complete, the repayment schedule will be that of a typical traditional mortgage.

The loan repayment schedule will have a range of around 15 to 30 years during which time the borrower will pay both the interest and the principal and it then falls under the category of either a fixed rate or a variable rate mortgage depending on the agreement between the borrower and the lender.

The borrower will pay a single set of closing fees, which will reduce the overall cost of the loan.

Construction only loan

This is a type of home construction loan that provides the funds up to the completion of the property. The borrower will then have to pay the loan in full at maturity, which is typically one year or less or have to obtain a mortgage to secure permanent financing.

The financial institution will disperse the funds in accordance with an agreed-upon schedule or phases of construction. Construction only loans can be expensive because you pay the closing cost of the construction loan and any other alternative source of permanent financing like a traditional mortgage.

Renovation loan

This is a type of home construction loan that provides funds for repairs or upgrades on an existing Park Grove residence. For small amounts, the borrower can opt for an unsecured personal loan, but for large-scale renovations, they can also opt for a mortgage-like product.

How home construction loans work for a new residence at Park Grove

Home construction loans are typically more difficult to acquire than traditional mortgages. The lending institution will require the same documents and materials that are provided when applying for a traditional mortgage including the credit status of the borrower. In addition, the borrower will also have to furnish the lender with the plans, specifications, construction schedule and time frames, budgets, and the developer’s financial statements.

The lending institution will then evaluate the building contract and determine if the cost estimates provided by the developer are plausible. They have to do this to reduce the risk exposure of over financing the construction at above-market costs.

The potential homeowner at Park Grove has to provide a significant financial buffer when carrying out home construction to cater for contingencies like over-runs in the project like the project running over budget either due to delays or market fluctuations in construction materials costs or the developers simply underestimating the costs.

Financial lenders demand more stringent terms as qualification criteria. It is advisable that the borrower works on improving their credit score and provides an adequate deposit as a cushion for unforeseen contingencies.


What homes construction loans cover

The whole construction loan you will acquire for your Park Grove residents covers the costs of the work and materials for the construction. It includes all the costs necessary to complete the project including permits and interior finishing expenses but it does not cover removable items like furnishings.

How to get a home construction loan

The borrower should have all the documents that the lender requires for the application. They should also have a significant deposit as a cushion for project overruns and should have met prior with the architect and negotiated a builder’s contract which would include the total cost and project time frame.