Construction loans

Financing

Are you uncertain about how to finance your upcoming project? We can put you in touch with a select group of lenders who specialize in construction loans and can help you find the best financing options for your needs or you can use your own lender and shop around.

A construction loan is a short-term loan used to finance the building of a new home, covering the costs of construction and converting to a permanent mortgage once the home is completed.

Construction loans are disbursed in stages, known as “draws,” as the construction progresses, with interest paid only on the amount withdrawn.

 

Yes, there are different types of construction loans, each designed to meet various financing needs. The main types include construction-to-permanent loans and standalone construction loans. A construction-to-permanent loan allows you to finance the construction of your home and then automatically converts into a traditional mortgage once the construction is completed, simplifying the process by keeping everything under one loan.

On the other hand, standalone construction loans (or construction-only loans) provide funds for the construction phase but require you to secure separate permanent financing (a mortgage) once the construction is complete. This means you’ll go through two separate closing processes, which could potentially lead to higher costs.

In terms of land purchase, some lenders allow the cost of the land to be included as part of the construction loan, enabling you to finance both the land and construction under one loan. However, other lenders may require you to secure the land with a separate land loan before they approve the construction loan. The approach varies by lender, so it’s important to clarify these details when exploring your financing options.

Construction loans typically have higher interest rates than traditional mortgages and require a down payment of 20% to 25% of the total project cost. Other costs include closing fees (2% to 5% of the loan), out-of-pocket expenses for inspections, appraisals, and permits, and monthly interest payments during construction. Additionally, lenders often expect you to have reserves for unexpected costs that may arise during the building process.

Yes, a construction loan can include both the cost of the land and the expenses associated with land preparation before the actual building begins. When you apply for a construction loan, the total loan amount can be structured to cover the purchase of the land, along with necessary site preparation activities such as grading, clearing, and utility installation. This comprehensive approach allows you to finance the entire process—from acquiring the land to preparing it for construction—all under one loan.

However, it’s important to note that not all lenders offer this type of combined financing. Some lenders may require you to have already purchased the land through a separate land loan before they will approve a construction loan. In these cases, the construction loan will only cover the building process and any remaining site preparation. Additionally, even if the loan includes the land, lenders often require that you have secured the land or have a contract to purchase it before you can get pre-qualified. The land itself typically serves as collateral for the loan, making it a crucial part of the financing process.

Yes, construction loans generally have higher interest rates compared to traditional mortgages due to the short-term nature of the loan and the added risk involved in financing a home that hasn’t been built yet. Rates can vary based on the lender, the borrower’s financial situation, and market conditions. If you’re interested in finding current construction loan rates in Washington State, you can check them out here.

The first step is to get prequalified

This involves submitting some basic financial information to one of our preferred lending experts or your own lender, who will then provide an estimate of how much you may be able to borrow. A lending expert can help you navigate the complex world of construction loans, ensuring that you understand all of your options and that your loan fits within your budget and financial goals. With a prequalification letter in hand, you can begin exploring home plans and selecting the features and finishes you want in your new home.

Once you’ve chosen your home plan and made any necessary modifications, we’ll provide an upfront price before you sign a contract. Most lenders will require a signed contract with a licensed builder and detailed construction plans to proceed with the formal loan application or pre-approval process. At this stage, we’ll also assist you in ordering the necessary permits. Obtaining these permits is a critical step before construction can begin and may be necessary for the final loan approval. You can also take advantage of our turnkey service and let us handle all the permitting and land preparation.

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Typical Costs of a Construction Loan

The cost of a construction loan can vary based on factors like project size, property location, and the borrower’s creditworthiness. Typically, construction loans have higher fees and interest rates than traditional mortgages due to their complexity and risk. Borrowers usually face out-of-pocket expenses during pre-construction, such as permits, plans, and contractor bids, and may need a down payment of 10% to 20% of the project cost. Additionally, any upgrades or changes to the original plans often require out-of-pocket payment. At Inspire Homes, we collaborate with lending experts to help clients understand these costs and prepare for any out-of-pocket expenses.

 

The cost of a typical construction loan can vary depending on a variety of factors, including the size and scope of the construction project, the location of the property, and the borrower’s creditworthiness. In general, a construction loan will have higher fees and interest rates than a traditional mortgage, due to the increased risk and complexity of the loan.

The borrower will typically have some out-of-pocket expenses during the construction process, particularly during the pre-construction phase when the borrower is responsible for obtaining necessary permits, creating detailed plans and designs, and getting bids from contractors. Additionally, the borrower will typically need to make a down payment on the loan, which can range from 10% to 20% of the total project cost.

During the construction process, the borrower may also be responsible for paying for any upgrades or changes to the original plans that are not covered by the loan. For example, if the borrower decides to upgrade the kitchen appliances or add a custom feature to the home, they will need to cover the cost of these changes out of pocket.

It’s important for borrowers to have a clear understanding of the costs associated with a construction loan before they begin the process. This can help them plan their budget and avoid any unexpected expenses or delays. At Inspire Homes, we work closely with our preferred lending experts to help our clients understand the costs and fees associated with a construction loan and ensure that they are prepared for any out-of-pocket expenses

How Loan Disbursements Work

The loan is typically disbursed in a series of payments, or draws, as the construction process progresses. Here’s a breakdown of how a building loan works and the draws at each step:

  1. Pre-Construction: The pre-construction phase includes obtaining the necessary permits, creating detailed plans and designs, and getting bids from contractors. During this phase, the borrower typically pays for these costs out of pocket.
  2. Foundation: The first draw is typically disbursed after the foundation has been poured and inspected. This draw covers the cost of the foundation and any other necessary site work, such as excavation or grading.
  1. Framing: The second draw is usually disbursed after the framing is completed and inspected. This draw covers the cost of the framing and any other related costs, such as roofing, windows, and doors.
  2. Rough Mechanicals: The third draw is typically disbursed after the rough mechanical systems are installed and inspected. This includes electrical, plumbing, and HVAC systems.
  1. Insulation and Drywall: The fourth draw is usually disbursed after the insulation and drywall have been installed and inspected. This draw covers the cost of insulation, drywall, and any other necessary materials.
  2. Finish Work: The fifth draw is typically disbursed after the finish work has been completed and inspected. This includes things like flooring, cabinets, countertops, and paint.
  1. Final Inspection: The final draw is disbursed after the final inspection has been completed and the certificate of occupancy has been issued. This draw covers any remaining costs associated with the construction, including cleanup and landscaping.

Contact us today to learn more about financing and our preferred lending experts.