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Understanding the Construction Loan Timeline

We understand the struggle of finding the perfect home. Sometimes it may seem like you’ve seen every listing in your preferred market and still haven’t found any homes that resonate with your vision.

Well, what if we told you that you didn’t have to settle on your ideal home? What if you could design and build a home to your exact specifications so you don’t have to give an inch on your wants or needs?

Guess what? You can. A picture-perfect home doesn’t have to be a pipe dream. 

We’ll walk you through the construction loan timeline so you know exactly how to finance your dream home. But before we dive in, let’s cover a few basics.

What’s a construction loan?

This is a short-term loan that’s used to cover the costs of building a new home from the ground up. It enables borrowers to buy a vacant parcel of land that they can build a house on. These loans are typically granted for a specific amount, as their purpose is to finance the building process before long-term funding is obtained by the borrower.

What does an interim construction loan pay for?

Short-term construction loans are intended to cover pretty much every cost that’s associated with the construction of a new home. In general, they’ll cover the cost of the land, building materials, contracting labor, permits, reserves, related fees, and closing costs. But, in some cases, they may also fund appliances, landscaping, and permanent fixtures.

How is this type of loan secured?

This is a tricky question. Essentially, construction loans aren’t backed by any collateral. Unlike traditional mortgages where your existing home is put up as collateral in case you default on your loan, construction loans are used to fund the building of a new home. Meaning there isn’t already a home to use as security for the lender. So, these types of loans will be “secured” by the future value of the home once the building is complete.

Four main types 

Construction loans come in many different forms. But, for the most part, they all still follow a similar construction loan timeline.

Construction-to-permanent loan

With this option, you'll get a construction loan to finance the building process of the house or major renovation. Then, upon completion of the home, the loan will convert into a conventional mortgage loan.

Construction-only loan

True to its name, a construction-only loan only offers the necessary funds to complete the construction. Once the home is finished, the borrower must repay the loan in full or get a new mortgage to secure permanent financing.

Renovation loan

A renovation loan is designed to fund the upgrade or “improvement” of an existing home. So, while this type of loan isn’t for building a home from scratch, your construction loan timeline won’t look that different if you use a construction loan solely for home renovations. 

Owner-builder construction loan

The three loans we just mentioned all require the borrower to hire a licensed contractor to perform the labor. But, if you’d like to get a construction loan without a contractor, you can do so with an owner-builder construction loan. This type of loan is specifically intended for borrowers who will act as the general contractor throughout the entire project.

Construction loan process timeline

Now that you’ve been briefed on the four common types of construction loans, let’s go over what a general construction loan timeline looks like.

construction loan

Find the perfect spot

Before you build your perfect home, you need to find the perfect location. So, take some time to scan vacant plots of land in areas or neighborhoods where you could see yourself living in.

Secure a licensed builder

Your Uncle Ned may be handy with tools, but unless he’s a licensed contractor, he’s not going to make the cut. As a construction loan requirement, you need to show your lender proof that you’ve hired a licensed builder with a long standing reputation for building homes that are up to code and high quality. 

Get pre-approved 

Moving along the construction loan timeline, getting pre-approved is one of the smartest decisions you can make before you fill out a construction loan application form with your lender. 

The pre-approval process tells you how much money you’ll be able to borrow with your qualifications and specific situation. In turn, this is why doing a pre-approval before getting a construction loan can save you time in the long run. For example, if you’re already too far along in the construction loan timeline and you haven’t been pre-approved, you could lose money on the blueprints, plans, and materials you paid for if you don’t end up getting approved for the loan.

Apply with a lender

Wondering when to apply for a construction loan? The perfect time to apply is once you’ve found the optimal location for your new home, secured a professional builder, and completed the pre-approval process. 

Similar to applying for a traditional mortgage loan, you’ll need to meet certain financial qualifications. But, unlike getting a traditional mortgage, you’ll also need to show your lender in-depth details regarding your future home since you won’t have an existing home to put up as collateral.

Borrower requirements

Here’s some information you’ll need to provide your lender when you apply for a loan to construct your new home.

  • Credit score and credit history
  • Proof of income and debt-to-income ratio
  • Bank statements and employment history
  • Proposed down payment

What you’ll need to show your lender

At this point during the construction loan timeline, your lender will want to see detailed plans for your future house. This includes plans that describe the architectural process, blueprints, inventory and cost of proposed materials, floor plans, and a timeframe for each phase of construction. The blueprints and floor plans will help in determining the appraised estimate of the value of the home post-construction. Likewise, the budget for labor and materials will help your lender estimate how much funds you’ll need for the building process from start to finish.

Your lender will also ask to see the licensed general contractor you hired to build your home. Securing a contractor who has proof of a solid reputation for building high-quality homes will boost your chances of receiving funds. Additionally, your lender may ask to see a list of the subcontractors and suppliers you’ll be using.

Begin the drawing process

Once you’ve secured construction financing from a lender, you’re at the point in the construction loan timeline where you can start building your dream home. So, how does getting the money to construct your new house work?

Let us introduce the progressive drawdown function of these loans.

Most construction loans are doled out in specific portions, which are referred to as “draws.” This series of payments align with the different stages of the building process. For example, you’ll get an installment payment when the framing of the house begins, when the home’s foundation is laid, when the roof is put on, etc. During this draw process, an appraiser or inspector will also come to monitor the progress and approve milestone achievements to give the green light on releasing the next round of funds.

While a progressive drawdown may seem like strict borrowing, it can also be seen as an advantage of a construction loan. This is because it limits the borrower from impulse spending and going over budget during the build.

Pay it back

Because these are short-term loans, the new construction home loan process involves the conversion of the construction loan into a traditional mortgage once the home is finished. This might also be referred to as refinancing the construction loan into a permanent, conventional mortgage. 

However, depending on the type of construction financing you opted for, you may be required to pay the entire loan in full by the time the building is finished. Or, you might get an End loan, which means you’d get a new loan to pay off the construction loan.

A lender you can trust

Now that you know what the construction loan timeline looks like, you’re one step closer to building the home of your dreams. Talk to one of our mortgage experts for guidance on borrowing funds so you can build your perfect home from the ground up.

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