What to Know About Land Construction Loans

Building a home in the perfect location requires a lot of patience and understanding of the process.

Current numbers show that land development in the United States is a $12 billion industry.

Land construction loans allow buyers to buy land to build on. Read on to learn more about these loans and what you should know about the process.

How Do Land Construction Loans Work?

A construction loan is short-term and allows for the building and purchase of real estate. These loans allow you to buy land, built a home on land you already own, or even make renovations on an existing home.

With land construction loans, you’ll only receive the amount of money you need. The money is given in “chunks” as each portion of the project is complete. 

You’ll only pay interest on the amount of money you borrow. A standard loan gives you 100% of the money upfront, which you must pay interest on the total immediately.

When you get home building loans, you make interest-only payments based on the outstanding balance. In some cases, you don’t start making payments until six to 24 months after you get the loan.

Contractor Payment During Construction

Once you meet construction loan requirements and get approved, the building process begins. As each milestone is complete, the builder requests a “draw” for payment from your lender.

You can also get a construction spec loan. Click this link to learn how it works, and what it means for you.

An inspector verifies that the work is complete before the draw is given to the builder. If everything looks good, your builder receives payment and moves on to the next phase. 

Funding and Loan Payoff Information

Most construction home loans last less than one year. Once the home is built, you’ll pay it off with a new, permanent loan. Construction loan rates vary depending on your credit, your lender, and the size of the loan. 

The build completion date is officially when the construction loan period ends. You’ll need a professional appraisal of the home before you can refinance it into the new permanent mortgage.

One way to do this is to apply for a new loan after the home is built. You’ll have to apply again and pay closing costs as if you were getting a brand-new mortgage.

Another way to transfer to a permanent loan is to do a single close loan. This will eliminate the need to apply and pay closing costs twice. Talk to a mortgage lender about your options to determine which one will work for you.

Build Your Dream Home

If you want to build a brand-new home on a piece of land, then getting land construction loans is the best option. Keep these tips in mind to help you find the loan that will suit your needs.

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