Construction Loans

Finding your perfect dream house might sound fun. But, it can be challenging. There are many styles to choose from – colonial, ranch, mid-century, etc. Sometimes people do not even know where to start. If you have decided on your favorite style, certain factors play a crucial role, such as the size and location of the home. With these factors and limited good properties in the market, it might not be easy to find the ideal home within your budget.

Are you unable to find your perfect home? Why not build one? Constructing a new home allows you to create a picture-perfect home without worrying about the factors of buying a home that is already constructed without your specifications. But to finance your home construction project, you might need a home construction loan.

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1 What is a Home Construction Loan?

What is a Home Construction Loan?

A home construction loan is a short-term loan that covers the cost of custom home building. It is a different type of mortgage loan and is called specialty financing. Once the home construction project is over, the prospective occupant has to apply for the mortgage to pay for the complete house. There are several other types of home loans, from the ground up the building to complete remodeling of the house. There is surely a loan out there for you, whether starting from scratch with land or reconstructing your home.

What Do Construction Loans Cover?

The new construction loans cover the cost and expenditure that come from the labor and materials used to construct the new home. The estimated amount paid for the work goes into the loan amount and the type and the amount of the necessary supplies. You can use the amount cover permits, interior finishes, and other miscellaneous costs involved in the building of the house. The things included in the contract will depend on the decision made by the borrower and the lender himself.

Let us talk about the different types of new construction loans available: –

Construction Only Loan – It is a loan issued for a year. It covers the actual construction period. The construction-only loan is considered to be a high-risk loan. It includes several variables like getting approvals from the local municipalities, builder’s cooperation, and many other factors that consume a lot of time and effort. These loans are complex and not easy to qualify for.
Construction to Permanent Loan – It is a financing option that prospective custom home builders can go for. These loans are similar to construction loans. These are one-time loans to fund the construction and then convert into a permanent mortgage. The borrowers may pay interest-only payments during this period. We would advise you to go around and compare rates to find the best deal.
Renovation Loan – The renovation loans are used for funding home renovation projects. These loans are insured by the Federal Housing Administration (FHA). These loans allow the borrower to purchase the land and renovate their home by paying a single monthly cost for both costs.
Owner-Builder Loan – When you construct a home, there is usually a general contractor who is the head of the whole project. These contractors make sure that the wood flooring people, painters, tile people, and all other laborers work in coordination to complete your home before the deadline and ideally on budget.

What are the Common Construction Loan Requirements?

There are certain requirements when it comes to construction home loans. Let us talk about a few of them: –

Your Credit Score

Just like home loans, credit score matters in the case of construction loans. It is one of the most crucial aspects. A lender expects your credit score in tip-top shape. Construction loans require good credit for approval. So make sure to look at your credit score before entering the market for a loan. Try to improve and better the score a few months before applying for the new construction loan. It is better not to make any large purchases in the month of applying for the loan.

Your Income

With a good history of credit and an impressive credit score, the income of the borrower is another crucial factor that the lenders take into consideration. Lenders will ask for the financial verification of the documents. They do it to confirm if you are financially stable to repay the loan. Low debt to income ratio means positive chances of getting a loan.

Construction Plan

Every lender will like to see if the borrower has properly curated the construction project before borrowing the funds. They will be interested in seeing the plans and specifications of the house you are planning to construct. Take your sweet time in compiling your blue book before you start looking for funds for financing. An appraiser might also review the plan and specifications to decide the value of the property that will dictate the final value of the loan. So, make sure you have a solid plan in hand before you reach a lender.

Construction Contractor and Lender Review

Unless you are a general contractor, you will have to hire one for the construction of your house. That happens in most cases. The lender will also look closely and review the contractor before approving the loan. So it is better to choose an experienced one. The contractor is one of the most crucial aspects of the construction and loan process. Lenders are interested in knowing the cash flow projected and the budget involved in the project. Also, they will review and approve the construction contract that both parties (contractor and borrower) have signed.


You will have to talk to credit unions, local banks, or financial institutions for hard money construction loans. Remember, not every lender offers these loans. So you will have to explore. Considering how long it takes for the construction project to finish, the interest rates will be affected. Some lenders offer the option of long-term rate-lock. Are you looking for a hard money lender for new construction? Visit RCD Capital.


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