Building a new home from scratch is an exciting opportunity to start anew, as you’ll have the chance to design a property that reflects your needs and wants. If you’re thinking about how to fund your project, learn more about applying for a construction loan. Here are the answers to a few frequently asked questions about these loans. 

What You Should Know About Construction Loans 

How do they work? 

Construction loans can be one of two types: construction-permanent mortgage or construction-only mortgage. The first combines your construction costs and long-term mortgage, allowing you to close on one loan rather than two, which saves you time and money. Also, the interest rate is set and guaranteed.

Construction-only mortgages cover just the construction costs. Once the project is done, you’ll apply for a separate permanent mortgage. In this case, the interest rate is generally not guaranteed until the house is finished. 

In both situations, the lender pays the construction loan directly to the borrower in installments, called “draws.” Before making each draw, the lender evaluates the status of the project. The bank then transfers the total cost to the borrower upon completion.  Typically the borrower makes interest only payments during the construction period.

What is the application process like? 

The application is more complicated than other loan applications. You’ll need to present a detailed plan outlining your construction project. The packet should include information on your builder’s credentials, blueprints, an itemized budget, a payment schedule, and a signed contract. The approval process may take a few weeks. 

Do I need to put money down? 

As with most loans, you will need to put money down. Usually, at least 20-25% of the total equity is recommended for a down-payment. Lenders may require you to purchase private mortgage insurance if you are putting less than 20% down.

Can I use it for a remodel?

Generally, you can use a construction loan for a tear-down or remodel project. However, the process may be more complex, and the terms less flexible compared to new home construction. You may also need to contribute more to a down-payment.

If you’re interested in securing a construction loan for your new home, turn to Armstrong County Building & Loan Association. For more than 90 years, this financial services company has served clients throughout Ford City, PA, providing check cashing, IRAs, and second mortgages. Call (724) 763-7137 to speak with a friendly staff member about your upcoming project. Visit the website to learn more about this hometown lender.