How to obtain a New Home Construction Loan for your New Custom Home Project
By Mark J. Donovan
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If you are planning to build a new custom home and need financing, you or your builder will need to apply for a new home construction loan.
A new home construction loan is a common product offered by banks and other lending institutions. A construction loan is effectively a mortgage during the construction phase of your new home. Typically a construction loan can be converted over to a conventional mortgage after the home construction is completed. A construction loan works in the following way. You or your builder applies for a loan for the construction of your new home. |
As the new home construction progresses, you or your builder will draw from the loan to pay for labor and material construction costs. You or your builder will submit receipts to the bank or lending institution for the various subcontractor labor and material costs charges associated with building your home. The bank will review these charges and issue payments to the subcontractors and home supply centers.
| As money is drawn down from the original new home construction loan amount, you will begin to pay interest on the money that has been disbursed by the bank. As construction continues and more bank disbursements are made, you will incur higher monthly interest payments.
Once the home construction is complete you will need to convert the new home construction loan over to a conventional mortgage where you make monthly interest and principal payments. Frequently lending institutions have a mechanism in the new home construction loan that allows for the easy conversion of the construction loan into a conventional home mortgage. |
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When looking for a new home construction loan it is wise to shop around. Banks and other lending institutions are always hungry for investing in good business ventures and residential home building is a market that they consider excellent business. As a result, there are usually an array of new home construction loan offerings with different rates and terms to choose from. So spend some time talking with a number of lending institutions before applying for a new home construction loan. Make sure you pay close attention to the construction loan to conventional loan conversion process, and the interest rate you will pay with the conventional loan.
| It is also important to mention that lending institutions will require as part of the new home construction loan application a complete construction package of your new home. The construction package will need to include building plans, building schedules, bill of materials, labor and material costs, contractor/subcontractor names, and expected payment schedules.
In addition, frequently banks are adverse in providing construction loans to homeowners, without the involvement of a licensed general contractor. Finally, lending institutions usually prefer that you own the building lot outright as a form of collateral. |
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For more help on building a new custom home, see HomeAdditionPlus.com’s New Home Construction Bid Sheet. The New Home Construction Bid Sheet provides you with the knowledge on how to plan a custom home building project, and what to look for when hiring contractors for your new home construction. It also includes a detailed cost breakdown table and spreadsheet for estimating your own new home construction building costs.
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