construction loans

According to research by the National Association of Homebuilders (NAHB), the volume of residential construction during the second quarter of 2018 increased by 1.7 percent. It was the 21st consecutive quarter of growth in the residential housing market.

You can attribute the growth of residential construction to the ease of getting credit. Residential construction loans have seen a consecutive increase year after year, giving clear pointers of the emerging new properties.

An analysis by NAHB and the Federal Deposit insurance corporation shows a $1.3 billion increase in the outstanding stock of construction loans of the 1-4 unit residential properties during the second quarter of 2018. Therefore, you can say that construction loans contribute to positive development.

Here is everything you need to know about construction loans.

What Is a Construction Loan?

A construction loan is a short term loan with high interest that helps in covering the cost of building a new home or redeveloping one. It is very different from a traditional home loan.

A traditional home loan is dependent on the fair market value of the home. You need to know the condition of the house as compared to recent sales.

A construction loan, on the other hand, is evaluated based on the home value projections upon completion of the work. There are three types of construction loans available.

1. Construction-to-Permanent Loan

You can get this loan if you have set plans and deadlines to meet. For this type of loan, the bank takes care of the payment as the work progresses. The overall cost then changes into a mortgage during the closing.

This loan enables you to lock the interest rates during the closing and allows for regular payments.

 2. Construction-only Loan

You can get this loan if you have enough cash to work or if you are confident that the amount you get when you sell your home can cover the building of another house. You must pay this loan all at once when the construction ends.

3. Renovation Construction Loan

This loan comes in handy if you want to buy a house that needs repair. There are available government programs to aid in this case. The  Construction Loan Centre can help you calculate the renovation costs included on the mortgage and the price of the property.

How Do Construction loans Work?

A construction loan is covered in installments. A bank with a construction loans program helps by paying the builder in several steps up until the construction is complete. After the completion of the project, the bank then transfers the costs to you.

The installments are set to provide the builder with the amount they need to cover a specific building phase. Therefore, you need to provide the builder with the money to cover the costs upfront.

The bank, however, has to perform an inspection before making any payment to ascertain the cost estimate of the building phase. They also check on whether the builder is moving according to the set timeline.

Using a Construction Loan for Your Project

Construction loans can help you to cover several costs. You can use it to get a new house or to renovate one. It is a good option if you are building your home for the first time.

However, you need to have a strong financial standing for it to work with your project. Are you looking to start your first home construction?

To learn more on ways of securing your first construction loan, keep reading our blog.

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