We’ve seriously looked at building our dream home. We are just in the planning stages. But, a construction loan is a vital part of the planning stages. Unfortunately, it is part of the final aspects of this stage and not the beginning. Though it is good to know the basics of  this type of loan.

Basics of a Construction Loan

The first question if you are looking for a loan to help build or improve your home, is if a construction loan is the right fit for you.  The problem is that even a well versed person, may have trouble understanding what a construction loan really means.

A construction loan is typically something that is obtained prior to building a house. It is often gathered by a company or a prospective owner.  The best part of a construction loan is that usually no payments are required until the construction is complete. Interest will still increase or accrue during this period on the amount that is borrowed.

If you are approved for the loan, it stays in your account and you can use it as needed. In some cases, the bank keeps the money and you submit invoices or bills and they will pay for them.  The money is withdrawn to pay for the work of the contractor and subcontractors that work on you.  But in some cases, the maturity date can be a different choice, such as 3 or 6 months.  The key is that when a construction loan is given, they want a house built.

Often a prearranged schedule is set forth. This means that you often don’t get the entire sum that is borrowed. But you must meet certain stages or guidelines.   This is termed a short-term loan.

The first thing that needs to be done is to have the plans drawn up for the home. As you consider how much it will cost for the basement, yard, plumbing, painting and drywall, keep in mind that often you will get 80% of what the property will be worth in your construction loan.  Keep in mind the lot that you are going to purchase and everything that needs to be done.

Finding a Good Bank

Research with the banks that you are currently with or with those banks that your friends are accustomed with working with. Find out the interest rates, the maturity timing, and especially the pitfalls that can be experienced. A good bank will work with you. I’ve called my bank a few times and asked them several questions about  a construction loan.

I’ve also sat down and talked about my debt to income ratio and if this is really a good time for us to build. My bank has been superb at giving me the down and dirty about my choices.

A good bank is essential at succeeding at our dream homes.

Construction Loan for Home Improvements

If you are deciding to add onto your existing home, a construction loan may also be beneficial. An appraisal on your home value needs to be done. It also must be valued on how much your home will improve by your new work.  So, if you are thinking of adding another kitchen, a basement, or build that garage that you’ve always wanted, then keep this in mind.

But remember, especially for finishing a basement, a construction loan may not be the best choice. It still may be a choice, but look around and understand what is out therefore you.

Be a Good Planner

If you are seriously looking at building your first home, remember that things can quickly get complicated.  There are so many things to think about. The intention of a construction loan is to get things done as quickly as possible. If you haven’t seriously looked at contractors for framing, flooring, plumbing, electrical, and the dozens of other areas that need to be researched, things could be a problem. You’ll also need to get on board with a good Home insurance company. Don’t let this be something that skips you by.  Make sure to get all of these things done before looking at a construction loan.

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