After finding a home builder you trust, securing financing is one of the more challenging aspects of new home construction. Though it’s generally easier to obtain a loan for a completed property, some credit unions and regional banks offer loans for this purpose. Called construction loans, they differ from traditional home financing in several ways. Santoro Home Improvements, based in Hamden, CT, shares a brief guide on how this loan works.

What Is a Construction Loan?

A construction loan is designed to provide you with additional funding while the building process is underway. Since it is used to finance the project, it typically has a short-term duration of six to 12 months. The release of the proceeds is incremental and follows the project’s construction stages. While the project is underway, you must pay interest. Once the home is complete, you either pay off the balance in full or refinance with a standard mortgage. In some instances, homeowners can use construction loans for home rehabilitation or restoration.

Why Are There Strict Requirements?

Construction loans represent a niche in the home lending industry. Only a few lending institutions, like community banks and credit unions, offer this alternative, as they know the region best. Because construction loans are considered risky, they have relatively high interest rates and require down payment of about 20% to 30%. The substantial up-front investment is your equity in the home, an assurance you will see the project to completion. Drawdowns are done in intervals and according to the construction project schedule. Before releasing each installment to the home builder, a lender’s representative will visit the site to check on the progress. The lending institution will distribute funds to the contractor when they’re satisfied their spending to date has been appropriate.

How Do You Apply for a Construction Loan?

As with any loan, first determine your credit score and gather documents to assess your financial standing. To obtain approval, you’ll need to show detailed specifications, including floor plans and construction materials, about the project. This documentation, called the “blue book,” should come from a qualified, licensed home builder with a solid reputation for excellent workmanship. Aside from the construction details, you should have an estimated home value from a licensed appraiser, with calculations based on the blue book and comparable structures in the area. After securing financing, you’re ready to start building your new home.

Trust the home builder experts at Santoro Home Improvements to finish your dream home. This licensed general contractor has a solid reputation for building quality homes in Hamden and the surrounding areas. Call (203) 287-9787 for questions about their new home construction process and visit them online for samples of their work.