What is a Construction Loan?

Usually, when you purchase a home, you need some sort of mortgage to help pay for it (these are usually standard mortgages). However, if you’re ahem – building a home from scratch, these sort of “standard mortgages” might not be the best thing to help you.

Rather than standard, you might need a construction loan. But what’s a construction loan? Read on to find out more!

A construction loan is short-term or temporary financing that is paid (usually) through a serious of installments as the building of your home continues to progress.

Because, technically, no home exists, these types of loans can be considered a tad riskier. The lender doesn’t have any sort of collateral, so you’ll usually need to make a bigger down payment of at least 20%. But, while your home is under construction, you will make interest-only payments until the home is completed.

When you apply for the loan, you’ll need to make sure you have each and every detail of your home construction in place before you apply.

Finding a lender is another hurdle you’ll have to jump. You could potentially ask your contractors for a recommendation; that way you know your lender has plenty of experience with this type of loan. A lender will also help guide the borrower through the process, as well as make sure your timeline stays on track.

Just like the “standard mortgages” – there are multiple types of construction loans. You’ll need to talk with your real estate team to determine which would fit your project best.

For more on construction loans, check out Rocket Mortgage’s article.

Stop by Alliance Title’s blog for more real estate guides and tips.

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