Introduction to Construction Loans

Constructing a new residence or business is often very exciting. If you’re prepared to start construction on your new property as soon as possible, a construction loan may be right for you. However, to apply for this loan you’ll need to be equipped with some useful knowledge on how construction loans differ from traditional home loans. For example, construction loans create projects that lenders can check to make sure the loan is being used properly.

In that sense, construction loans are what we call “story” loans. As opposed to attaining a traditional purchase money loan for a specific, pre-constructed property, construction loans can involve a great deal of uncertainty if the land is vacant. As a certified construction loan lender, we wants to follow up on your investment to familiarize ourselves with our clients’ projects in case their financial needs adjust.

Prior to qualifying for a construction loan, we highly recommend collecting all necessary paperwork, and in the case of a business, all relevant personnel. It’s critical to contact us for a preliminary, complimentary, no-obligation consultation so that you can better know your borrowing capacity. Once we identify the associated property and purpose, we can begin the pre-qualification and pre-application process.

Purpose of Construction Loans

The primary function of construction loans is to adequately finance the construction of a new home or business. A construction loan generally helps an aspiring homeowner or business founder by providing a personalized property built from the ground up. Lot loans and purchase money loans only provide the money for buying assets. Construction loans, meanwhile, basically function as an extra line of credit that the borrower can tap into to draw funds at specific intervals to keep investments or renovations on track.

If you’re buying a home or business from a production home builder (even if construction hasn’t yet completed) then you most likely will buy the home or business after it’s been completed using a standard purchase money loan. Though if you’re buying an already-built home or business – whether it’s pre-owned or a newly specialized property – you also typically would use a purchase money loan. Some use the term “end loan” to describe when a buyer uses a loan to purchase a new home after the builder has financed construction of the home.

New homes may be built on a lot or land that already is owned by the borrower, and in this case a construction loan primarily is used to fund the materials and labor for building the house. However, a borrower also can use funds from a construction loan to purchase new property as the homesite, whether the borrower is purchasing from a separate landowner or directly from their builder who may be both selling the lot and building a home for them. In this scenario, the closing for the construction loan would occur simultaneously with the closing for the purchase of your homesite, with the construction loan funds (and your down payment) being used to purchase the land.

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