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While this can be a very exciting time in your life, you probably have a lot of questions, too.

Beyond what the home looks like, you need to understand if you can get a loan to build a house, how home construction loans work, how much you will need to put down on a construction loan and more. Here are answers to the top questions we hear at First American Bank about construction loans.

How do construction loans work?

A construction loan is a short-term, fixed-rate loan that’s used to pay for the building or renovating of a home while it’s being built. Funds are paid to the builder as they complete the work through a special account called a construction escrow account. This is a popular home loan option for people looking to build or renovate a house

What does a construction loan cover?

A typical loan for house construction extends for one year and will cover:

  • Labor and building materials
  • Excavation
  • Permits and fees
  • Inspections
  • Closing costs
Comparing a Construction Loan vs a Mortgage

One of the biggest differences between a mortgage and a construction loan is that the lender will pay the money out in draw periods, which are based on milestones of the home construction project. Construction lenders will require an inspection to be done at each of these stages before paying out the draw. First American Bank will take a good look into the architectural plans, budget, builder/contractors, materials used, expected future value of the project and the borrower’s personal finances to ensure we feel comfortable with the construction loan.

How does a construction-only loan work?

A popular type of home building loan is a construction-only mortgage, also known as two-close construction loan. This is a loan taken out solely to pay for the cost of the construction project. This type of loan gives the homebuyer the option to seek a home mortgage loan separate from the original construction loan after the house is built. Construction-only loans can be attractive for those who already own a home and are building their next house.

Ready to apply for construction loan?

Not every bank offers new home or renovation construction loans. Before you draw up plans for the home of your dreams, it’s smart to get pre-qualified or pre-approved to find out how much you can afford to spend on construction and your mortgage. You can also get a general idea of your home mortgage budget with our mortgage calculator. As with all big financial decisions, you’ll also want to make sure your credit is in order. If you’d like help on understanding how credit is calculated, read our related article. Contact a First American Bank loan officer to learn more about how we can help you finance your dream home.