Can You Explain How a
Construction Loan Works?
The term of a construction loan is normally six months but can also be longer. This will usually provide a home buyer with more than enough time for the completion of your new house to be built. During that time, the buyer makes interest-only payments based on the amount of money that the builder draws out of the account for the various stages of construction. There are also permits that must be executed before construction can begin, and these are usually the first expenditures from the construction loan.
Many times your builder will recommend a loan officer to you and request that you use them for the financing. This is usually because the builder and the loan officer have reached an agreement on how the “draws” for constructing the house will be issued.
You also need to acquire a “builder’s risk” insurance policy. These policies protect you and the builder against losses before you take possession of your home. Once you complete settlement and own the home, the policy converts to a regular homeowner policy.