What is the Difference Between a Construction Loan and a Regular Mortgage Loan?
This is a question I get a lot from my clients. The qualification guidelines are similar to a purchase mortgage loan but construction loans are somewhat different in other ways. For example, the interest rate is typically locked in from the time of application to the completion of your home.
Another big difference is how the loan is handled through construction. On a construction loan, you close on the loan prior to the start of construction. All closing costs and down payment are paid at that time.
During the build there are typically 5 draws (percentage of the loan based on what stage the house is at) that are requested by the builder from the bank. The client must approve and sign off on every draw request before it is submitted to the bank. The bank will then do an inspection before each draw is released. When the inspection is satisfactory the funds are then released to the Builder as payment.
The client pays interest only back to the bank on the amount that has been released. The payments gradually increase over the build period based on the total funds that have been released. These are usually interest only payments through construction. The loan will automatically convert to a fixed loan upon final completion of your home.