Construction loans are typically shorter-term loans that pay for building a home. When construction is complete, most borrowers take out a new loan -- typically a traditional mortgage -- to pay off the balance of the construction loan. Construction loans are ideal if you have a specific idea of the type of home you want and need. They are designed for the special needs you may encounter during the process.
How to qualify
Construction loans are more complex than a standard mortgage. That's why it's important to work with an experienced mortgage lender.
In general, you will qualify for a construction loan if you have good credit and meet these requirements:
Talk with a banker
- Have a qualified builder
A qualified builder is a licensed general contractor with an established reputation for building quality homes.
- Detailed specifications
This includes floor plans, as well as details about the materials that are going to be used in the home. Builders often put together a comprehensive list of all details (sometimes called the “blue book”); details generally include everything from ceiling heights to the type of home insulation to be used.
- The home value estimated by an appraiser
Although it can seem difficult to appraise something that doesn’t exist yet, an appraiser evaluates the specs of the house, as well as the value of the land that the home is being built on. These calculations are then compared to other similar houses with similar locations, features and size. These other houses are called “comps,” and an appraised value is determined based on the comps.
- A down payment
You may be able to put down as little as 10% depending on your credit score and home value.
to start the application process or apply online
to get prequalified. When you're ready to meet with your banker, make sure to bring all of the information listed on the Mortgage Checklist
When you are having a home built, this loan is designed for the special needs you'll encounter with new home construction. Generally, a lot loan can be used to take advantage of low rates or the availability of a specific property, while a construction loan is used to build on that lot.
If you’re buying or building a new home, a bridge loan lets you complete the purchase and closing process before you sell your current home. It’s a short-term financing tool which is expected to be paid back relatively quickly.