09 Mar 2021

What is a construction loan?

What is a construction loan?


A construction loan will provide the bank financing you need to build your home. Construction loans are structured differently than traditional mortgage loans. This article will discuss the process, benefits and common mistakes made with construction loans so that you can have all the information you need to get into your perfect home. 


The first step in the construction loan process is to get approved for the loan by the bank. You will have to get approved for both the construction loan and the mortgage on the home. This will require going through the traditional mortgage process. This means that you will have to provide proof of income, proof of debts and proof of employment in order to be approved for both the construction loan and the mortgage. Once the loan is approved, the mortgage company will make payments to the contractor to cover the price of construction of the home when certain milestones are reached. Once construction is complete, the construction loan converts into a traditional mortgage loan and you make payments on that loan as if you had purchased an already built home. 


A construction loan provides the benefits of stable, guaranteed payments for the contractor working on the home. It allows the construction company to know that it will be paid for completed work. The construction loan also has the benefit to the purchaser of the home of not being a payment on a full loan. The buyer is only making payments on the portion that has been paid out, not the full amount of the loan. 


It is important to be careful to not go over the budget on your construction loan. As a fixed-price contract, the mortgage company has already determined the proper amount for your construction loan and has loaned you that amount. The mortgage company holds that money to pay the contractor, it is not money in your hand. Going over budget may not even be a possibility, the bank has to make that decision. It is advisable to stay in budget. 


While a construction loan can be challenging to obtain, if you stay in budget, it is the perfect way to get a good contractor to build you the home of your dreams.

Mortgage House

At Mortgage House, we’re no strangers to the homeowner’s journey. It’s an exciting and very rewarding one. If you’re thinking of applying for a home loan, you can Apply Online today to get started!

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