What is a Construction-only Loan?

Construction-only Loan

A construction-only loan is used to finance the build of a house. This is not a mortgage. It is strictly for the materials, labor, and construction of the house. Because homebuyers are not purchasing an established residence, qualifying standards are more difficult. But this gives buyers the freedom to build their house the way they want to.

The Process Behind Construction-only Loans

Buyers will have to submit two applications when they choose a construction-only loan. The first is for the loan to build the house. The second is to refinance that loan into the mortgage. Lenders are going to want to see plans for the build of the home: the estimated budget, the schedule, etc. With this information, lenders can figure out the total money needed for funding.

Interest only payments are made via prearranged milestones during intervals in the build. Lenders will check on the progress of the house before dispersing the funds.

Once the house is built, the original loan is refinanced into a mortgage. This is where buyers can save on costs, since they are not locked into a set rate and can shop around. Although buyers should be aware that interest rates fluctuate, so even if they may save money looking for different loan options, interest rates could increase during the construction phase.

The Costs

More money is spent on:

  • Two sets of closing costs
  • Two approvals for the individual loans.
  • Rates tend to be higher than a regular mortgage.
  • Extra documentation.

The Benefits

  • Flexible rates because buyers are not locked into one rate.
  • Buyers can shop for better loan terms after the build phase.
  • Interest-only payments during the build phase

The Benefits

This all depends on a buyer’s situation. Although rates tend to be higher, buyers can keep them lower than Construction-to-Permanent loans by shopping around for a better interest rate during the construction phase. It all depends on if buyers want flexibility over security.

More Mortgage Loan Info

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