Whether you’re looking to build your very first home or building the house of your dreams, chances are good you’re going to need to seek financing. Construction loans for newly built homes are either acquired by a home builder or a potential homeowner. If you’re interested in learning about Texas construction loans, please read on for a better understanding of everything that’s involved.

Basics

Let’s proceed on the premise that you’re thinking about applying for a construction loan. These types of loans can be hard to get without a previous banking history, because there’s a lack of collateral involved. Banks have specific rules and these consist of monitoring the progress of a construction project, in order to guarantee timely completion, so the borrower can begin the repayment process more quickly.

Construction loans are generally short-term with a maximum of one year, but each lending institution has its own rules. These loans normally have a variable finance rate, because it will change with the prime lending rate. The rates on a construction loan are typically higher than the rates one would receive on a permanent mortgage loan. To be approved, a lender will need to see a construction schedule, detailed plans and an accurate budget for the use of the loan.

Approval

Once a construction loan has been approved, the borrower will be placed on a bank draft or draw. The schedule that follows will be set according to the project’s construction phases and normally the borrower will only be required to pay on the interest, while the home is under construction. As funds are requested, the lender will typically send someone from the bank to physically check on the progress of the project.

Upon completion, which is defined by a certificate-of-occupancy being dispensed, as well as full payment of the contractors, the borrower’s loan obligation will be converted into a traditional mortgage. Ideally, there will be an agreement where the borrower will only need to pay one time on any closing costs.

As of late, lenders have been combining the construction loan and a mortgage into a single, 30-year loan with only one closing and this is referred to as construction-to-permanent-financing. Because of a bank’s higher loan-to-value jeopardy, it may be necessary for a borrower to bring a bit more to the table. A lender may only offer to cover a certain percentage of the costs of your project, so if you already own land, that may be able to serve as a source of equity.

Construction delays because of inclement weather or materials and/or labor availability are pretty normal. Be advised to set aside some allowances for these factors into your construction timetable.

You may be wondering why construction loans aren’t offered online. Well, for starters these loans only represent a small percentage of actual home loans. Secondly, they can be a big risk for the lender. That’s why this type of financing isn’t the sort of thing lenders will aggressively advertise online.

Without a pristine credit rating or a strong relationship with your lender, you may have a hard time finding an affordable construction loan. When you apply for a construction loan, you can assume a lender will do credit and background checks on you and your contractor.

To qualify you will need strong credit and may be required to put down a certain percentage as a down payment. An appraisal and home inspections are required throughout the process of building a home, otherwise the lender will not release the funds.