New construction loans are becoming more popular than ever, and many people are choosing to build their new homes. So, if you’re looking to build your dream home, especially with the financial assistance provided by new construction lenders, it’s the best time to do it. But, before you jump on the bandwagon and acquire a loan, you must understand the loan package in detail.
What are New Construction Loans?
A new construction loan is a short-term loan used to cover the cost of building a new residential property or renovating an existing one. New construction loans are usually one year in duration. During this time, the house should be made and a certificate of occupancy issued.
New Construction Financing Explained
Lenders adhere to different credit policies and prerequisites when processing new loan applications. However, most are alike. Here is a list of how lenders fund construction loans:
- Lenders will finance the loan amount you need to cover the cost of buying vacant land and construction costs.
- Before construction begins, and if you’ve already borrowed to buy vacant land on which you’re constructing your new house, the first loan disbursement made by the creditor will pay off the vacant land.
- Instead of receiving funds from the lender as a single lump sum, it’s paid out in draws. These draws correspond to different stages of the construction process. Your credit provider will determine the draw schedule.
Benefits of Construction Loans
These three big-time benefits will help clarify that this type of loan can do wonders for your business.
1. Hassle-Free Eligibility
Compared to conventional mortgages acquired through banks, construction loans provide a simplified approval process with no collateral required and more flexible credit standards, making it easier to meet eligibility prerequisites.
2. Quicker Turnaround
When you visit a bank for a traditional loan, the loan approval process takes several months, which can stall a project’s inception. But when you apply for a new construction loan, you’ll generally discover a shorter approval process, at times as little as two weeks.
One of the main benefits of construction loans is that they’re short-term. Construction loans make sure that you get the financing when you need it, and while the term is flexible, it’s typically short enough that significant interest doesn’t accrue.
If you’re trying to construct a new structure or make an addition to an existing structure, you’ll likely need some capital to meet your goals. New construction loans offer you the perfect way to get the money you need for labor, building materials, etc.