Construction Loans
If you can’t find the home you want, it’s time to think construction. Does that sound too challenging? Not when you have CrossCountry Mortgage as your lender. Our in-house construction team specializes in making the financing hassle-free for you and your home builder so you can focus on what’s important for your new house.
What is a construction loan?
There’s no mystery here. A construction loan is a mortgage to build a home. There are different types, and there are variations, but at its most basic, you take out a construction loan when you want to build rather than buy a home. They are generally short-term loans lasting up to a year, although there are popular loans that transition to a traditional mortgage once construction is complete. Some loans also allow you to finance your land purchase and your construction costs.
How does a construction loan work?
Traditional purchase home loans pay a lump sum at closing to buy the property. Construction loans are a little different. Prior to loan closing, the builder provides an estimate of construction costs and a project timeline. The lender makes payments (called draws) directly to the builder as construction moves forward. The loan is usually interest-only, making it more affordable if you are renting or paying another mortgage during construction.
Construction loan types
There are several loan options for home construction. Let’s focus on a few of the more common types.
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Also called a construction-to-permanent loan, this mortgage allows you to borrow the funds for your home construction, and then convert to a traditional fixed-rate mortgage. You can include your land purchase, too. One big advantage is that you have only one closing, so you save on closing costs. You’ll also have only one application, which means less paperwork than if you had to take out a separate loan.
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A land or lot loan is exactly that. A loan to buy vacant land. Depending on the loan, the land can be used for traditional home construction, or manufactured, modular, or mobile homes.
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You may not think of a manufactured home as construction, but they are eligible for one-time close construction loans. Manufactured homes are factory-built, 1-unit dwellings secured on a non-removable steel frame or chassis and affixed to a permanent foundation. To be eligible for a loan, the home must be multi-width (double or triple wide), never have been placed on a foundation, and meet additional loan requirements. Note that manufactured homes are not the same as mobile homes.
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Accessory dwelling units (ADUs) have become increasingly popular as homeowners look for ways to create rental income or provide homes for family members. An ADU is a separate dwelling space on the lot of your primary residence and may be either attached or detached from the existing home.
Local zoning plays a major part in determining if you can build an ADU, so your first step is to check with your local authority. Home equity loans and lines of credit, renovation loans, and cash-out refinances are commonly used to finance ADU construction.
Construction loan requirements
Because construction loans are more complex than traditional mortgages, the application process can be more challenging. However, your loan officer and CCM’s in-house construction team will help you understand the process and smooth the way for a successful build.
The way to start is with a pre-approval so you can get your information organized, but generally, you’ll need:
- A credit score of at least 620
- Lower debt-to-income ratios
- Strong income history
- A higher down payment
How to get a construction loan
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1
Talk to a CCM loan officer
Our loan officers work together with our dedicated in-house construction team to find the right construction loan for you.
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2
Complete a loan application
At CCM, we offer a convenient online application, or you can contact our loan officers directly to help start the process. You’ll need the standard mortgage documentation demonstrating income, assets, employment, and credit.
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3
Choose a reputable builder
The contractor you choose will have to provide their qualifications to prove their competence and legitimacy, including financial statements, current license, and insurance. The National Association of Home Builders is one resource to use when you’re looking for a builder.
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4
Get a signed construction or purchase contract
Your builder or developer will need to provide this.
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5
Provide a full set of plans and specs
These will come from your builder or developer. Review them carefully. You’ll want to know exactly what’s covered.
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6
Submit a detailed budget with a cost breakdown for the home
It will need to include contingency funds to cover unforeseen costs, but since these funds do not cover voluntary change orders, you may want to budget separately for upgrades or other changes.
Once you close your loan, CCM’s in-house construction team will manage the draws according to the home’s progress. When it’s complete, the last draw will not be released until a final appraisal confirms the home’s value, and that it was built according to the plans and specs.
Construction tools
Related articles
What are Home Construction Loans?
Manufactured or Mobile Home Financing
How to Get a Construction Loan
