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Construction Mortgages: What Are They And How Do They Work?

Ken Venick • Feb 10, 2021

 

Financing the construction of a home requires a specific kind of mortgage versus buying a new or older home. That’s where construction mortgages come in!

 

What are construction mortgages? 

 

A construction mortgage is a specific mortgage used to finance the construction of a brand new home. The good thing about these loans is that they only require interest to be paid during the construction period. And it’s paid in increments as the home is being built. The loan amount is due once the house is done being built, and then becomes a standard mortgage from there. 

 

How does a construction mortgage work? 

 

Construction MortgagesFinancing to build a new home typically comes in the form of construction-to-permanent construction loan. This includes a loan to cover the construction costs, and a mortgage on the finished home. This is advantageous to homeowners , as you’ll only have one closing loan since you only have to apply once. Many homeowners choose to use a construction mortgage because it can prevent delays and makes sure costs are covered on time. There are a few ways a lender can present a construction mortgage. For example, it might include interest-only payments during construction, or could offer interest rates that are locked in once construction starts. 

 

What types of construction loans are there? 

 

Construction-to-permanent loan : This loan might also be referred to as a single-close construction loan. Put simply, there is only one closing at the beginning of construction, which means you only pay the closing costs once. This allows you to lock in your interest rate throughout the entirety of the loan. Once the construction is finished, the lender will then turn that loan into a permanent fixed or adjustable-rate mortgage.

 

Standalone construction loan: This loan solely covers the construction. When the construction is complete, you’ll need an additional mortgage to pay off that construction debt. This means two closings and sets of fees will be required, and you can’t lock in a mortgage rate. This could mean you risk rates increasing before you go about getting the second loan. On the flip side, this option can mean lower down payments, which allows borrowed time to look for a mortgage once their home is done being built. 

 

What should I consider when choosing these loans? 

 

Like any loan, your debts, income, and assets will all be evaluated thoroughly. You also have to have a signed purchase or construction contract to qualify. The agreement should include detailed info on start and completion dates and costs. Before considering a construction loan, make sure you have your finance ducks in a row, and are knowledgeable on all costs and services that will be provided. 

 

If you’re looking for help in receiving a construction loan, you’ve come to the right place! With over 30 years of experience, Ken Venick can put you in the right place for your homeowner wants and needs. Visit our FAQ page to learn more about our services, and contact us today. 

 

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