Should You Get a New Home Construction Loan? A Closer Look

Did you know the supply of American homes was at a record low in 2021? There’s a large gap between supply and demand. If you’re considering building and applying for a construction loan, keep reading.

This guide will go over why you should get a new home construction loan and what it will cover. You’ll also learn about the process of applying for a home loan.

Ready to learn more? Keep reading.

What Will Your Construction Loan Cover?

A construction loan will typically cover all the expenses of building a new house.

Some expenses will include land payment, contractors, materials, fees, permits, and plans. You will also usually get the interest reserves and closing costs covered.

What About Loan Rates?

The rate for a construction loan remains a bit higher than your typical mortgage.

You should expect to pay one percent higher than a conventional mortgage rate. Your loan amount or credit score could affect what you’ll pay in interest.

The kind of construction loan you end up choosing will also affect the rate. The rates remain variable and will fluctuate throughout the loan’s lifespan. Learn more about spec home loans.

What Costs Don’t Get Covered?

Your loan will only cover fees associated with the construction of your new house.

Your lender will pay the contractor directly. Your lender might approve you for a specific lump sum. But the contractor receives money for work they complete.

You won’t get any of the leftover funds. You will only pay on the money your lender pays your contractor.

How Will the Construction Loans Work?

A construction loan can cover the fee for construction and the land.

There’s also more lender involvement with this kind of loan. Before receiving a loan, the lender will need to see the building schedule, budget, and plan. The lender will then figure out the loan amount.

Once you get approved, you won’t receive the money. Your lender will pay the contractor at different intervals. The lender will check the house’s construction before releasing extra funds.

The release of the money is a draw, and the small disbursements will keep the project moving on schedule.

The first draw will cover the permits and prepping the land. It will also cover subflooring and framing. Your lender and the contractor can help determine the draw schedule.

What Will You Need When Applying for a Home Construction Loan?

After determining the kind of construction loan you want, gather what you will need.

The lenders need around 20 percent down, though some may take less.
Before applying, ask for an architect to draw the plan. Negotiate a contract with a reputable general contractor.

You’ll also need the necessary documentation. A lender will need documents like proof of identity, tax returns, and pay stubs.

Will You Get a New Home Construction Loan?

Did you find this guide helpful? We hope you learned more about a new home construction loan. 

Ensure your paperwork is in order, and get an architect to draw up the house.

Need more helpful tips like this guide? Check out our home improvement section.