Construction Loans

Construction loans are typically short-term loans that give you time to build a home and then you generally need to occupy the home right away. The details can vary between lenders so be sure to read the fine print.

• Terms are typically one year only.
• Rates tend to be slightly higher than home loans because there's no collateral to secure the loan.
• You need to submit a detailed construction timeline, plans, and budget to your lender and follow construction loan guidelines.
• If approved, your lender will give you a draft or draw schedule that shows how much money you will receive at each stage of your build. For example, when the foundation is laid or the roof is put on.
• An appraiser will inspect the home at various stages to make sure you're on track.
• During the build, you may pay interest only on the loan and then start repaying the principal amount you borrowed at the completion of construction.
• Once complete, you will need a Certificate of Occupancy to show the home is safe to inhabit.
• You may be able to convert your construction loan into a mortgage (construction-to-permanent loan) or you may need to take out a new home loan.

Construction loans can cover a range of costs, depending on your circumstances:

• Land (if you have not already bought it)
• Labor costs for contractors and other personnel
• Materials for building
• Permits and other necessary paperwork

The down payment for a construction loan is a minimum of 20% of the cost to build plus the cost of the land.

The minimum score to qualify for a home loan is 680 and requires an excellent credit history. The higher your credit score the more options you have for financing your home. Higher scores also get lower rates.

The information and documents you need may vary depending on your personal situation. Common documents for construction loans include:

• Copy of plans, specifications and contract to build
• Current pay stubs to include the last 30 days
• Current bank statements to include 30 days
• Last two years of W-2s (if Self-employed you want 2 complete years tax returns for the business & personal returns)
• Signed copies of your last two years of Federal tax returns with all schedules
• $550 deposit for appraisal

Your monthly payment will typically include principal, interest, taxes, and home insurance (PITI).

You likely won't need to pay PMI as construction loan down payments start at 20%.

Mortgage insurance protects lenders in case a borrower defaults on a loan. For example: If the down payment on a conventional loan is less than 20%, you may be required to have mortgage insurance. The cost of PMI is often rolled into the monthly payment.

Closing costs are fees to process and close your loan. Some examples include title insurance, appraisal, recording and credit report fees. You’ll be responsible for closing costs.