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What Are Construction Loans?

Although it’s always thrilling to move into a new residence but new construction has its special benefits. If you’re the very first to live in the house it is possible to customize the features of your home to suit your personal preferences. You have the power to influence the design and landscaping decisions so that the home is entirely yours.

But, building a new house is different from purchasing an existing house. This means that you will need a different kind of loan.

What are the advantages and drawbacks of drawing down a construction loan? Let’s look.

Construction loans and traditional loans

In a conventional mortgage, you choose out the home you’d like and pay a specific amount to make a downpayment and then get an additional loan to pay the remainder. The lender will pay the seller the entire amount in one lump sum and you repay the lender in monthly installments.

It’s not so with the case of a construction loan. In a construction loan you are able to borrow money to cover the cost of materials and labor needed to build the home, however the lender isn’t able to make payments in one go. Instead, they pay back what’s known as “drawdown installments.”

These payments occur at various stages of the construction process. In most cases, there is a cash payment at the time the land is bought and another after the foundation is poured or the framing is finished and a drawdown to fund the work inside and the finishing and a final installment to cover the costs of landscaping. Every stage the lender will send inspectors to verify that the work is in line with the requirements of their company, and thus protect their investment.

What are the Pros and Cons of Construction Loans

A construction loan provides buyers the opportunity to be involved in the building of their home and take an active part in the construction of the home they’ll eventually live in. Because the lender offers inspectors, the borrowers get the assurance that their house will conform to the most stringent standards of construction.

In the case of an owner/builder, buyers could save money by carrying out the job themselves instead of employing an expert contractor.

But a construction loan will require more paperwork and requires involvement by the lending institution. Along with the normal documentation of assets and income people who are borrowing money for construction loans will require building plans and forms from a certified construction company, schedule and much more. The additional paperwork could be a burden for certain.