How do construction loans work?

Building your home from the ground up can be extremely rewarding. You get to have a lot more control over your property’s design and construction, and starting from scratch can be an adventurous passion project.

But how can you finance both the property purchase and construction? Do you need one loan for the land and another for the house? Will a standard mortgage work? 

Here’s a quick rundown of your main options.  

What are construction loans?

Construction loans can cover the cost of raw land, building permits, construction and other expected financial obligations between purchasing land and building a home. They typically include a completion time limit of 12 months, though buffer limits for both budget and construction time can vary. 

Most construction loans can be divided into two main categories: 

1. One-Time Closing Loans

Often called construction-to-permanent loans, these are actually two loans conveniently bundled into one closing appointment. 

You start with a construction loan, paying only interest throughout the building process. Once construction is complete, your balance converts into a mortgage, which you’ll pay back monthly just like any other conventional mortgage loan. 

There are various loan terms and rate types (adjustable or fixed) for one-time closing loans to fit your plans and needs. One of the most appealing benefits of a one-time closing loan is that the merged process can help decrease your closing costs.

2. Two-Time Closing Loans

A two-time loan includes two loans with separate closings. This means you can potentially use separate loan options to seek out better interest rates, but you’ll have additional closing costs. 

Though the variety of options can be financially advantageous for some borrowers, others may find the process of qualifying and applying for two different loans difficult depending on their circumstances.

Financing your dream home can feel complicated, but it doesn’t have to be. Get in touch today to discuss your options.