If you are looking to buy a home right now, you may be struggling to find one that fits all your needs. You may be thinking about moving some of your must-haves into a nice-to-have category, but what if there was a way to get your dream home with less compromise? One way to do this is by taking out a construction loan. A construction loan may be a great option for you if you’re looking to move into your perfect dream home, and don’t mind waiting for it to be built.
What is a construction loan?
A construction loan is a loan that helps cover the cost of a brand-new home. Typically, you'll need to get a mortgage after the home is built, however, here at Arbor Financial Credit Union, our construction loan also includes the mortgage phase. Having both the construction and mortgage phases included in your loan means one closing process. Only having one closing means lower fees, less red tape, and a quicker completion of the project.
What does the construction loan process look like?
Once approved for the loan, you will need to provide the lender with a construction timeline, detailed plans, and a realistic budget. When your timeline and other materials are authorized, the lender will pay out the loan to the contractor in stages that follow the schedule of the build.
For example, a payment (draw) may happen when the framing of the house begins, or the roof is put on. During the construction phase, you will only have to pay interest on your loan. While the home is being built the lender can have an appraiser come in to check the house and make sure the work being completed is up to code. If you are working with Arbor, once your home is built, your loan will automatically convert to a mortgage and full payments will begin.
What does a construction loan cover?
A construction loan can be used to cover most of the building costs. This could include: the cost of land, contractor labor, building materials, and permits. In some cases, permanent fixtures, like appliances and landscaping, can also be included.
Important things to know:
Typically, rates change throughout the life of your construction loan, but with Arbor Financial’s construction loan, you will have one fixed rate throughout the life of your loan. Your rate may be slightly higher than a traditional mortgage due to not having a completed home as collateral. Since your lender pays the contractor directly for the work they do during the construction phase, you will not get any extra money at the end of the building phase. Fortunately, you only pay for the money the lender paid the contractor. So, you won’t need to pay the original loan amount if you are under budget- just what the contractor was given.
Building your own home is a great way to get everything you want in your home without compromise, and at Arbor Financial the process is made to be easier for you. Speak with one of our mortgage lenders today to find the right option for you!
