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Managing Your Construction Loan for Your Dream Home

Posted On: 02/10/2022

Wooden model home on top of blueprints

A mortgage to finance the purchase of an existing home or property isn’t for everyone. Prospective homeowners may struggle to find the perfect home on the market. A construction mortgage loan may be the way to make your home dreams become a reality. However, construction loans are different when compared to traditional mortgages that borrowers should know about. Here, Generations Bank explains construction loans and how to manage one for your dream home.

Understanding Construction Loans

Construction loans start out with a construction phase then turns into permanent financing with a one close process. That allows an individual to construct their home from scratch, to cover expenses such as:

  • Land acquisition
  • Hiring a contractor
  • Permits for building
  • Construction materials
  • Inspections
  • Some home furnishings, such as major appliances
  • Landscaping
  • Construction-to-permanent (single-close construction) loan: This provides funds to cover the cost of constructing a new home and is then converted to a permanent variable- or fixed-rate mortgage once the home is complete.

Meeting Construction Loan Requirements 

When planning to build a new home, it’s important to know that construction loans come with a specific set of requirements. With traditional home mortgages, lenders can seize existing homes as collateral when borrowers default on payments. But with construction loans, the lender has a lien on the work that has been completed which is why these loans are considered to be higher-risk lending options.
Under a construction loan, the home and property must be completely built and receive a certificate of occupancy within the duration of the construction loan’s term, which is typically up to one year. Before being approved, the lender requires that borrowers:

  • Provide references and proof of business credentials for the builder
  • Be able to have General Contractor to provide license and insurance
  • Provide plans and specs of construction
  • Provide a detailed construction timeline (draw schedule) and accurate budget
  • Provide sufficient down payment
  • Meet credit score and debt-to-income ratio requirements
  • Provide income documentation to be able to prove the ability to repay the lender

Upon approval, a draw schedule will be established per the new build’s phases of construction. For example, borrowers will receive funds when the home reaches milestones such as laying the foundation. The lender will also coordinate inspections and/or appraisals throughout the entire process.

Get Started Today with Generations Bank

Generations Bank proudly serves the Finger Lakes Region and Western New York, and we’re standing by to guide you through the process of applying for and managing a construction mortgage loan. To learn more, contact our experienced team today.