10/26/2022 | Press release | Archived content
We love seeing you working toward your goals, especially when you've got your sights set on the house of your dreams. You know the one. The pool and the big yard, the spa-like master bath and large kitchen - whatever it is to you. Whether you're building from scratch or majorly renovating your current home, a new construction loan can provide the financing you need.
New construction loans are short term loans that cover the costs of rehabilitating or building a home, including the purchase of real estate, materials, labor, and permits. Since they're only for construction, the terms are typically for 12 to 18 months.¹ During that time, your interest rate is usually locked, however, if construction isn't finished at that time, you'll need to extend the financing and your rate could change to whatever the current rates are.
Unlike a mortgage, which gets paid out in a lump sum, a home construction loan is paid out in phases to the contractor building your home. As each phase is completed, the lender will give the contractor the money they need for the next construction phase and your payments will typically only be for interest on the amount that has been taken out. The timeline for each phase and the amount given out for each one will be summed up in a draw schedule, created by the lender.
When you have a complete home, the remaining balance can either be paid off, if you have the cash, or transferred into a mortgage. How this happens will depend on the type of construction loan you get.
Construction to permanent loan: If you have a construction to permanent loan, your construction loan will automatically turn into a mortgage when construction is finished. It's basically two loans in one - a construction loan and a mortgage. Also known as a single-close loan, this type of construction loan allows you the convenience of closing one time and locking in your rate on the mortgage during construction. The construction loan itself may still have a variable rate if construction goes on for longer than 12 to 18 months.
What's great about this type of construction loan is that it's less of a hassle. You already have the construction financing and the long term financing for when the house is done. Not only that, but closing one time means you don't have to make two down-payments, and the fixed interest rate on the mortgage gives you a predictable payment down the road.
Construction-only loan: Construction-only loans are for the building phase only. They do not convert to a longer term loan, and will need to be paid in full when the house is finished. If you've recently sold your previous home, you may be able to pay it off right away. If not, you will need to get a mortgage, which will pay off the construction loan and give you long term financing for your new home.
Lenders will require a lower down payment on this type of construction loan, making it more affordable right away. This works well if you are living in your current home and won't have extra cash for down payments until you sell. This option also gives you time to consider permanent financing from different mortgage lenders while construction is happening.
The downside to construction-only loans is that you risk interest rates going up before you close on a mortgage, which could lead to a higher monthly payment than expected.²
Renovation loan: If you are only looking to renovate an existing home, a renovation loan allows you to wrap the construction costs into your mortgage. Most commonly, this is used when purchasing a fixer-upper and you need to get a mortgage and a loan to cover renovations at the same time.
Owner Builder loans: If you want to build your own home, you can always go with an owner builder loan and be your own general contractor. In order to do this, you'll need to show experience in building homes or have a contractors license. Going this route means you will be the one receiving the funds from the loan, instead of a third party contractor.
Finding a local lender that can guide you through the process will be helpful. They may already have experience working with the contractor you've chosen and understand the cost of building in your market, which could make the entire process a lot smoother.
Once you've found the right lender they will take a look at these things for approval:
Most people turn to construction loans for building or rehabbing their home because they allow you to pay only on the interest of the loan during construction, and live in your current house while your new home is being built. Overall it's the most affordable option for most people and it keeps you from having to pay up front for everything.
If you are looking for alternatives, you do have some other options:
If you're ready to get started on that new house, or if you've got some great ideas of how to remodel your current home, we have lenders ready to help you get the financing you need. Our local lenders know the market for construction in your area, and they are experienced in helping you finance the house of your dreams. To find a Southern Bank lender, you can visit our Find a Lender page and search for one nearby. You can also call us at (855) 452-7272 to get started.
Found your dream home? Make it yours with a mortgage from Southern Bank.