Construction loans are available to qualified borrowers that are having a home built by a contractor. In a lot of cases, the builder requires the buyer to get financing for the project. That’s when you need a Construction Loan.
Here’s how they work. Your loan covers the cost of the project and the builder is paid as work gets finished. So let’s say the builder has excavated the land and poured the foundation. He would want to get paid for that part of the job. A ‘draw’ is requested from the construction loan to pay the builder. Once the lender inspects that the work has been complete – there really is a foundation there – the builder is paid. Usually there are 4 ‘draws’ or request/disbursement of funds during the project.
As the borrower, you pay interest only on funds disbursed throughout the construction phase. When the home is complete, your construction loan converts to an ‘end loan’. The ‘end loan’ can be an FHA, VA, USDA or Conventional mortgage depending on your qualifications.
Down payment on a construction loan follows lending guidelines. For example, if you’re a veteran, you could qualify for 100% financing. If you’re purchasing in an area deemed rural by the USDA & meet income requirements, you could qualify for 100% financing. FHA loans require a minimum down payment of 3.5% and Conventional loans require a 5% minimum down payment. Not every lender offers all options, however.
So go out there, have your dream home built and enjoy life!
Donna Holmer (NMLS# 258561) is Branch Manager & Senior Loan Officer for Diamond Residential Mortgage Corp. in Merrillville, IN. Any questions, feel free to contact Donna at 219 682 4208. Evening appointments available.