Construction Loans: Financing a Home from the Ground Up

Tuesday, April 12, 2016
Posted by admin under Construction Loans 

Construction Loans: Financing a Home from the Ground Up
Construction loans are short-term loans used to cover the cost of building a new home. Some builders will take on the loan, but others require homeowners to cover the loan. If you’re considering construction loans in Vermilion Co. Illinois, here are some things that you should know about them.

Application Process

The application process for construction loans is slightly different than other types of home loans. It typically requires more time and documentation in order to complete it. Lenders want to review assets, wages, and debts for the borrower, as well as the finances of the builder before approving the loan. Most lenders also require at least 20% for the down payment before granting approval.


There are generally 2 types of construction loans: single close or two-step loans. Single close loans cover the lot and the home. Two-step loans cover the lot and construction, but the homeowner needs to obtain a conventional loan for the home. Most lenders require a certificate of occupancy before granting the conventional loan. Construction loans last about 12 months unless the home is larger and more complicated. In that time, the homeowner needs to secure a permanent loan. Otherwise, they will be expected to pay fines or risk having the lender foreclose the property.
Construction Plans

How it Works

After getting approved for the loan, the borrower can withdraw money needed to cover the cost of materials and labor that has been completed. Along the way, the lender sends inspectors over to check out the progress of the home to ensure that it will finish on time. During this time, the borrower makes payments on the interest of the loan. Because it’s a short-term loan, interest rates tend to be higher than permanent mortgage loans. However, for individuals who choose a two-step loan, the conventional loan covers the rest of the construction loan.  


Most lenders require title insurance similar to mortgage insurance. They also require builder’s risk insurance, which covers any damage that the contractors may cause. This includes things like fires caused by the construction process. Depending on where the lot is located, it may be necessary to purchase flood insurance, too. Speak with the lender to determine which types of insurance are required for the loan.

Before completing the application process for a new construction loan, it’s important to weigh the pros and cons. Make sure that this is the right type of loan for you. Shop around for the best interest rates and monthly payments, and read the fine print so you know exactly what is expected of you during the construction process and when paying off the loan.

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