GROUND UP CONSTRUCTION LOANS

A construction loan is a specialized financial product designed to provide funding for the construction or renovation of a residential property. Unlike a traditional mortgage that provides a lump-sum payment for an existing home purchase, a construction loan provides financing in stages as the construction project progresses. Here's a closer look at the key features of construction loans:

• Progressive Disbursements: Construction loans disburse funds in phases, with payments made directly to contractors and suppliers as work is completed.
• Interest-Only Period: During the construction phase, borrowers typically make interest-only payments on the loan, which helps manage costs.

Construction Loans vs. Traditional Mortgages

Construction loans differ significantly from traditional mortgages. Here's a comparison to help you understand the distinctions:

• Purpose: Construction loans are exclusively for building homes, while traditional mortgages are for buying existing homes.
• Payment Structure: Construction loans have progressive disbursements, while traditional mortgages provide a lump-sum payment at closing.
• Interest Payments: Construction loans typically require interest-only payments during construction, while traditional mortgages involve both principal and interest payments from the start.
• Appraisal: Traditional mortgages require an appraisal of the existing property's value, whereas construction loans consider the property's projected value upon completion.

How Do Construction Loans Work?

Construction loans follow a structured process to ensure funds are disbursed efficiently and the project stays on track:

• Application: Borrowers apply for the construction loan, providing detailed plans, budgets, and estimates for the project.
• Approval and Underwriting: Lenders review the application, evaluating the borrower's creditworthiness, project feasibility, and budget.
• Loan Terms: Borrowers agree to loan terms, including interest rates, repayment schedule, and disbursement plan.
• Progress Payments: As construction progresses, lenders make payments directly to contractors and suppliers. 

Construction Loan Requirements

To qualify for a construction loan, borrowers typically need to meet certain criteria:

• Strong Credit: Lenders often require a good credit score to approve a construction loan.
• Detailed Plans: Detailed construction plans, budgets, and project timelines are essential.
• Down Payment: A down payment or equity in the project is typically required.
• Experienced Contractor: Working with a qualified, licensed contractor is usually a requirement.

Now that you have a comprehensive understanding of construction loans, you're better equipped to embark on your journey to financing and building your dream home. For personalized guidance and loan options, contact us today.