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The Concept of Construction Lending

Right now the residential real estate market is booming. While this is great news for sellers, it can make finding a home difficult for buyers. We keep hearing stories about buyers finding their dream home online only to see it sold minutes later.

After a while, the inability to find and purchase an existing home can inspire some homebuyers to call off the search and start building their own from scratch. These situations make the case for residential construction lending. If this story sounds familiar and you’re considering buying your home, rather than purchasing one that is already built, read on to learn about construction lending and whether it’s the right route to homeownership for you.

What is Residential Construction Lending? 

Simply put, residential construction lending is intended to support the construction of a new home. Typically, building a new home from the ground up is a costly endeavor. Rather than attempt to pay out of pocket, a construction loan can offset the financial strain by providing the funds to cover the costs of construction.

In most cases, these funds or “draws” are disbursed directly to the general contractor or builder. All funds from a residential construction loan are reserved to cover the costs of building your home, including permits, labor, materials, and other construction-related expenses.

How Does Construction Lending Work?

Just like applying for any type of loan, you will need to demonstrate a healthy credit history and reliability when it comes to paying off the loan. Unlike other loans, the different types of construction loans require a clear plan, specifically, a building plan for your new home. Your plan will include all estimated costs associated with the project. In most cases, your lender will request the name of the company you have hired to build your home, which they will then evaluate for approval.

Once approved, the builder or general contractor will request a draw for whatever materials and labor are necessary to break ground. As the project progresses, the builder will request additional draws and a lender-appointed inspector will evaluate the site for the lender before another draw is disbursed, to ensure that progress is being made according to schedule.

Building vs. Buying

Building your own home and pursuing construction lending to do so is different from buying an existing property. Buying a house listed on the market typically involves a traditional mortgage. For this reason, many homebuyers find it more cost-efficient to buy an existing home, rather than build a new. Home mortgages are also generally more secure and pose less of a risk than a short-term construction loan.

Of course, homeownership is not a one-size-fits-all proposition, which is why our team is standing by to help you determine the right type of home loan to fit your needs. Give us a call when you’re ready to discuss the type of financing you need to build your dream home.

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