![]() ![]() In this way, construction loans act as a line of credit. Instead, the lender will make payments to your builder through a series of draws-or installments-as they complete various stages of construction. You will probably also need to provide an estimated construction timeline and budget.Īfter you’re approved for a construction loan, you won’t receive all of the funds as a lump sum. Your lender likely will want to inspect your architectural plans and examine your financial situation before approving you for financing. For that reason, the application and approval processes for a construction loan also are more complex than for a mortgage. Unlike traditional mortgages, construction loans aren’t secured by a completed house. ![]() That said, some loans automatically convert into a permanent mortgage once construction is complete. Because construction loans generally are intended to cover the building process, they’re typically issued for a period of 12 to 18 months. If you already own the land, you may be able to use the property as collateral for your loan. You also can often use this money to purchase the land you’re building on. How Do Construction Loans Work?Ĭonstruction loans let future homeowners borrow money to purchase materials and pay for labor necessary to build a home. You also can use a construction loan to access contingency reserves-if your project is more expensive than you planned-or interest reserves, for those who don’t want to make interest payments during construction. Construction loans may cover the costs of buying land, drafting plans, taking out permits and paying for labor and materials. What Is a Construction Loan?Ī construction loan is short-term financing that can be used to cover the costs associated with building a house, from start to finish. ![]() Luckily, a variety of construction loans provide the upfront cash needed to pay for the land, materials and labor to build a new house. But construction costs can add up quickly and timelines can be unpredictable. Building a house from scratch can be a great opportunity to get the home you’ve always wanted. ![]()
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