Construction Financing Demystified

Construction Financing Demystified
Construction Financing Demystified
July 11, 2016 Russ Busa

Construction loans are essentially like lines of credit that you set up with a financial institution to pay for the cost of constructing a new home until the home is built. These loans differ from traditional home mortgages in several key ways:

* Construction loans are typically short term with a maximum of one year

* Construction loan rates are variable

* Construction loans typically allow for financing a maximum of 80% of the cost to build (if you already own the land, this can be part of your 20% down payment)

* Construction loans have different underwriting requirements including a construction timetable, detailed plans and a realistic budget

Because there is no underlying asset (house) securing the loan, you will have an easier time with financing if you work with a bank that has extensive experience with construction loans. Not only will they ease you through the process, but they will have a comfort level extending credit for construction.

Once you’ve been approved for your construction loan, you will be able to draw on the loan to begin paying expenses on a schedule that usually tracks the project’s construction stages. At the end of the project, the loan is typically rolled into a traditional mortgage once a certificate of occupancy has been issued and final payment has been made to the contractor. At this point, you are a homeowner!

Building a new home is an exciting and enjoyable process – especially with proper planning. Securing your financing is one of the first things you should do when considering financing the construction of a new home. Getting pre-approved early in the process – before you start drawing up plans - will save you time and money later on. Understanding how much you have to spend will allow you to make realistic decisions about your home through every step of the design and construction process.

Special thanks to Mark Butler, Vice President, Senior Loan Officer, Salem Five Bank for sharing his expertise for this post. Mark can be reached at or 978.273.7220.