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Thinking of building your dream home? Here's what you need to know about construction loans

Posted at 1:20 PM, Mar 16, 2022
and last updated 2022-03-16 15:20:24-04

Navigating the world of new construction can seem overwhelming.

Mountain America Credit Union (MACU) can help you decide which type of construction loan will best fit your situation.

Brittani from MACU joined us with more about loans that you can use to build your own home.

Brittani says, "You'll still have to go through a journey to get your dream home, however, unlike when you purchase an existing house, a custom home gives you the thrilling opportunity to add the features you want into the design! How great is that?"

You'll probably need to take out a construction loan for that process. A construction loan is simply a short-term loan (usually from 12 to 18 months) that manages and disperses the cost of custom home building.

A construction loan may cover the land that you'll build your home on, architectural plans, labor, and materials.

Brittani says the application and approval process is a bit more complex for construction loans.

This is because there isn't an existing home to secure the loan with, so a construction loan functions as a line of credit. The financial institution or lender will pay the builder, subs or suppliers directly in installments.

During the building, construction loans require you only pay the interest on funds that have been disbursed. Once the project has been completed, and upon proper documentation, the loan will either convert to a permanent mortgage or you'll need to qualify for a new mortgage to pay off the construction loan.

There are actually a few different types of construction loans. To mention a couple there is:

1. A one-time close option which funds the construction phase and then converts to a mortgage loan once complete

2. A two-time close option which funds the construction and then a separate loan must be opened for the mortgage phase.

Since these loans vary by lender, be sure to shop around to find the best option for your situation.

To learn more visit "A Beginner's Guide to Residential Construction Loans."