How to Build Your Dream Home with a Construction Loan

Ready to build the house of your dreams? Then you’ll want to understand how construction loans work. If you’re looking to build your first home, upgrade from your current home, or want to undergo a major home renovation, construction financing can help turn your dream into a reality. Here are the most common questions our local lenders at First Federal Bank hear about financing the construction of a home.

Can you get a loan to build a house?

Many home buyers turn to a construction loan to pay for building or renovating a house. This type of loan will pay for the construction of a home while it’s being built. A construction loan will pay the building contractor during construction. Construction loans typically cover the cost of the construction of the house and are converted into a traditional mortgage. Typically, home buyers only need to pay for interest during the construction period, but this will vary with the type of construction loan or mortgage you have.

What’s the difference between a Construction Loan and a Mortgage?

When buying a new home, many homebuyers will turn to a traditional mortgage, which will be largely based on the home’s value. However, when you’re building a new home from the ground up, there is no value to assess at the time, which is why a construction loan is needed. Since there is nothing backing up a construction loan in case of default, construction lenders will take a good look into the architectural plans, budget, builder/contractors, materials used and home buyer’s personal finances to ensure they feel comfortable. When you take out a construction loan to build a home, the lender will pay out the contractor in draw periods, which are based on milestones of the home construction project. Construction lenders will usually require an inspection to be done at each of these stages before paying out the draw.

Here’s an example of a draw schedule:

  • Draw 1: Foundation complete
  • Draw 2: Framing, windows, doors complete
  • Draw 3: Plumbing and wiring complete
  • Draw 4: Cabinets, countertops and appliances installed
  • Draw 5: Flooring, siding complete, Certificate of Occupancy issued

What is a construction to permanent loan?

The most popular type of construction financing is the construction-to-permanent loan which covers both the construction costs and mortgage in one loan. Some call this type of residential construction loan a two-in-one loan or a single-close construction loan because the homeowner will only have to pay for closing costs once because they are able to finance the construction and the mortgage into one loan. Notably, home buyers only have to pay for interest on the construction loan during the construction period, and once the building period is over, the home mortgage loan begins. At First Federal Bank, we offer a one-time close and offer a fixed rate from the start of your construction project to the end of your mortgage. This helps reduce stress of not knowing what rate you’d qualify for after your home construction is complete.

Should I use a Home Equity Loan or Line of Credit or a Construction Loan for home renovations?

If you are looking to renovate your house, you may consider using your home’s equity to finance your project and wonder if you should use a HELOC or Construction Loan. The answer depends on the amount you want to take out, and how fast you’d like to pay it off. For example, if you are planning a renovation for $30,000 and want to pay it off in a year, a home equity loan or line of credit may be best. If you’re doing a $100,000 home renovation and want to pay it off over 15 years, a construction loan may be your best option.

How much of a down payment do I need for a construction loan?

Because construction loans carry a higher risk, interest rates are slightly higher than with a traditional mortgage. Down payments can also increase due to this added risk. Most local lenders require a 20% to 25% down payment for a construction loan, however, First Federal Bank only requires 10% down payment for a construction to permanent loan. Some people also may want to use their land as a down payment, which can be done, depending on the equity and value of the land.

Should I buy my land first?

Many banks in OH, IN, MI will only finance a construction loan for an existing house, so if you own land and are looking to build on that, you won’t be able to get financing. However, First Federal Bank has an option for homebuyers to build a home from the ground up on land that you own, which sets us apart from the competition.

Ready to apply for Home Construction Mortgage in Ohio, Michigan or Indiana?

Before you draw up plans for the home of your dreams, it’s smart to get pre-approved or pre-qualified. You can also get a general idea of your home mortgage budget with our Mortgage calculators. Not every bank or credit union in OH, MI or IN offers new home or renovation construction loans. At First Federal Bank, we offer a one-time fixed interest rate for closing to cover both the construction and mortgage, and offer down payments starting at 10%. Plus, you’ll only have to pay interest during the construction phase. Set up an appointment with a local mortgage lender to learn about our construction loan rates and details to get started.

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