How Do Construction Loans Work For Homeowners?

Thinking about a remodel or building a new home? It’s a big step. Even so, if your growing family is finding your home’s spaces cramped or you finally want to bring your home into the 21st century (better late than never), you really don’t have a choice if you love your property and don’t want to move. You need a construction loans – and getting approved is all about pre-planning accordingly. This means you need to speak with the construction company conducting the build to figure out a ‘construction timetable’ that will allow your lender to know when they can expect the project to be done. You must also show the lender detailed plans of the remodel (these can be acquired by the company planning the remodel) along with an invoice that details the budget. If approved, you will be put on a draw (more on that in a moment) where you will likely make interest-only payments during the life of the construction loan.

That’s not the end of the story, though. Getting a construction loan is only the first part of the story. Below are a few other obstacles you will run into as you think about if a construction loan is right for your home at this very moment.

Better have your own cash

In other words, you’re going to need to make a down payment. The amount you will need to put down ranges, but expect to put down at least 10% of the amount of the loan; in some cases, this percentage may be higher. However, you may be able to use your land as equity to use as a down payment, saving you thousands of dollars in the process. Speak with your lender to learn about

your options, but always go into this process with the mindset that you will have to use some of your own cash.


As construction gets underway, it could feel very stop-and-go for a while. This is normal! You will get very acquainted with holdbacks due to money being withheld by your lender during each stage of construction to ensure everything stays on-time and on-budget. They also differ with each lender. Some will allow the borrower and builder to handle this themselves (after all, they know first-hand how the construction is proceeding and the current real-world costs); in other cases, a lawyer will keep the holdback in escrow as the draws progress.

Speaking of…

Constant inspection before draws

Since we’ve mentioned draws twice already, you may be curious what they are. A draw is simply a method for providing borrowers with access to the funds needed to continue construction. Access is granted between each phase of construction, but getting access isn’t always so simple. In-depth, constant inspections have to be performed before each draw is granted in order for lenders to ensure that everything is on-schedule, the budget is going swimmingly, and everything is safe and secure; after all, lenders do not want to be in any kind of legal jeopardy simply because the construction company hired decided to not do a satisfactory job with the build. Can it be a headache? Absolutely, but it’s necessary to ensure that the lender and the borrower comes out of this deal happy, safe, and financially sound.

By |2018-08-28T09:15:29+00:00September 4th, 2018|Mortgage Information|0 Comments

About the Author:

Diane Bertolin
Diane along with her team have over 120 years of real estate experience between them all from mortgage lending, to land development, construction, and real estate sales. Diane’s knowledge of economics, her fervent enthusiasm to read everything and her overall desire to help people to become financially independent lead her to this point of building her newest business. She joined the Unimor Capital Corporation team in September of 2016. Diane takes pleasure in helping people get the funds they need to get their dream property, but she also tells you when you cannot afford something. Diane strives to get you, your best mortgage or real estate investment.

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