top of page

Building Your Future: Navigating the Construction Loan Program



A construction loan, also known as a self-build loan or construction mortgage, is a type of short-term loan designed to finance the construction of a new home or major renovations to an existing property. Unlike a traditional mortgage, which provides funds to purchase an existing home, a construction loan provides the funds necessary to build a new home or make significant improvements to an existing one. Here are the key features of a construction loan:

Phases of Financing: Construction loans are typically disbursed in multiple phases as the construction project progresses. These phases typically include the purchase of land (if applicable), construction of the foundation, framing and roofing, interior work, and final inspections. Funds are released to the borrower or the builder in these stages, often after an inspection to ensure the work has been completed as planned.

Short-Term Loan: Construction loans are short-term loans, typically with terms ranging from six months to two years. During this period, borrowers make interest-only payments based on the amount of the loan disbursed.

Borrower and Builder Requirements: Construction loans may have stricter eligibility criteria compared to traditional mortgages. Lenders often require detailed construction plans, a qualified builder, and a larger down payment from the borrower.

Inspection and Disbursement Process: Lenders typically send out inspectors to verify that construction milestones have been met before disbursing funds for the next phase of the project.

Construction-to-Permanent Loan: Some lenders offer a construction-to-permanent loan, which combines the construction loan and the permanent mortgage into a single loan with one set of closing costs. This can simplify the process for the borrower.

Down Payment: Borrowers are usually required to provide a down payment for a construction loan, which can range from 20% to 50% of the project's total cost, including the cost of the land.

Final Inspection and Conversion: After the construction is complete and the final inspection is conducted, the construction loan is typically converted into a permanent mortgage. The borrower begins making monthly principal and interest payments on the long-term loan.

Construction loans are a valuable tool for those looking to build a new home or undertake major renovations. It's important to work with a lender experienced in construction loans and to have a clear understanding of the loan terms and requirements. Additionally, having a well-defined construction plan and budget is essential for a successful construction loan application and project.

For more information or to go over your own scenario, please contact mc at 408-393-2068

8 views0 comments


bottom of page