How Do Construction Loans Work in 2020? Home Build Requirements

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A construction loan is a short term loan that is used to pay for the construction of a residential house. Also, a construction loan can be used for additions and remodels as well. On these projects, within the loan process, since the final collateral has not been built yet, the proceeds from the construction loan are dispersed gradually as the home is built. Basically the construction note acts as a big line of credit. Before the project starts, there is a zero balance. As the lot is acquired, the foundation is dug and poured, the work commences. Money is dispersed from the construction money to pay for the labor, builder, and work done.


As more work is done the balance of the note climbs. When all the work is done and all the bills are paid, the final balance will get paid off by your long-term loan.  Interest on a construction loan also operates just like the line of credit. You only pay for what you use and when you use it. For example, if you borrow $25,000 the first month for work on your house your interest is just on that balance not the entire amount of your construction loan. Also, the interest payment usually isn't due each month but gets paid out of your construction note just like a bill for anything else in the house. This is so that it's not cumbersome for those still selling their current residents to make 2 payments. So when the home is built, a long-term loan or a long-term mortgage is obtained about the construction amount and then your payment will commence on your long-term construction loan..

Requirements plans

There are seven steps to acquire a construction loan to build your home. 

#1 Lot Purchase Contract
In other words, you have to buy a piece of ground. Either know how much it is, where it's and what is the legal address or description. This is crucial for your home loan and construction contracts.

#2  House Plans

Those building plans need to be completed from a license party with the specifications. Home construction is not to be confused with a DIY project. Also, consider the types of homes available to build within your zoning.  There are so many building floor plan ideas to suit just about anyone's needs. Get the best floor plan for your accommodations.

#3 Costs of Construction

A cost breakdown is generally coming from your builder. The Builder will tell you line item by line item literally from how much framing this will cost to roofing and everything in between. Those will be the numbers we use as we go through the construction loan process. We then have to have information on the Builder we want to make sure he knows how to build a house that he has experience in doing so and that he has all the insurances and liabilities in place just in case. There is a term called cost overruns. Check into costs to build thoroughly for the different types of home plans available.


4. Information on the Builder

If you had any clue how many things that could happen in this process you want a contractor that you know will do the job, won't leave and will finish it. What happens if you had a contractor that tells you everything you want to hear upfront but halfway through has some personal problems and leaves? You have to then go find someone else and you're gonna be at their mercy. You don't want to be in that position. Who that contractor is is critical. I need to throw in here real quick some people say what if I want to do an owner-builder. An owner-builder is where you build your own house that is possible but the lending industry doesn't like it. Go with a qualified builder and take a look at their completed homes.

#5 Construction Contract
You have to have a contract. How much is the home going to be? How long is it going to take to build? What's included and what's not included. There are intense stages of construction to be aware of in the home construction loan process. When your home is completed, you will have great satisfaction in owning a newly built house.


#6 Insurance Coverage
You need to have insurance to cover yourself just in case of an emergency for your real estate project.

#7 Mortgage Loan Approval

To begin within the loan process, it is crucial to have a long term mortgage loan approval. The loan amount you need for the final approval. You've got to have that saying up front, yes I qualify for that and dollar amount when the home is complete. Also at the end of the home construction, the lender has got to make sure that it's all on time. Mortgage rates are very competitive right now so be sure to shop around with several mortgage lenders. Your mortgage loan payment, in the end, is what you must be sure about.

construction process

Construction Loan Working Requirements

Many construction loan lenders see minimum equity and cash reserve requirements differently. Here are the basic rules. It's always best to own the land free and clear if you can. If this is not possible, equity requirements in the land can range from 20 to 50% of the purchase price or value depending on the acreage and the availability of needed utilities like water well septic sewer and power.


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