We have had good conversations with Great Midwest Bank and Tri-City National which were two of the banks we reached out to. Since a new construction loan is new to both of us, we had questions, and they both walked through their processes and how it works out. Both were even willing to give hypothetical numbers based on a loan amount we provided, knowing of course it would be ultimately dependent on what the loan amount actually ended up being, and what rates were at the time it gets locked in.

Here’s some general information on a new construction loan for those who might not be familiar with it.

What is a construction loan?
A construction loan is basically a short-term loan that covers only the costs of building the home. This is different from a mortgage, which is used to pay for the permanent home once completed. There are several key differences between a construction loan and a traditional mortgage. Construction loans are usually about a year in length and are for the building portion. On the other hand, traditional mortgages are long-term loans, with terms typically ranging from 15 – 30 years. With a mortgage, you receive the money in one lump sum. Upon closing on the loan, the payments start immediately and consist of both principal and interest.

When you take out a construction loan, you’ll usually make interest-only payments while the construction is being completed. Construction loans can cover just the cost of building (if you already own the land), or, like in our case, it will cover the land and the build. The approval process for a construction loan is pretty much identical to that of a traditional mortgage as far as what information you have to provide.

Once approved, you’ll be able to start accessing the funds in conjunction with each phase of construction. An appraiser or inspector will check in on the build throughout the construction process so that you can continue to have access to funds. Typically a builder will get money in 4 to 5 lump payments called draws. These happen usually at major milestones in the building process such as foundation completion, framing completion, etc.

After the home’s construction is complete, you’ll be issued a certificate of occupancy. Then, your construction loan will likely be converted to a traditional mortgage, and you’ll begin to make payments on the principal and interest.