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How Do Construction Loans Work? Everything You Need to Know

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With new homes in short supply, many homebuyers are turning to fixer-uppers to create their dream home. This also leaves many homeowners looking for construction loans to finance their fixer. So, how do construction loans work? Think of this as your guide to construction loans explained.

From how to do home construction loans work to the benefits of using one, we’ll go over everything you need to know about the construction loan process. Let’s start building your new dream home.

What is a Construction Loan?

A construction loan is a short-term loan that provides funding for renovating or building a home. The financer, bank, or construction loan company pays your contractors or builders directly over the duration of the construction project. This article explains in more detail the importance of inspecting the progress and staying on top of the work to make sure the funds are allocated when the work is completed.

How do Construction Loans Work?

When you take out a construction loan, this is often in addition to your mortgage. You could, however, pay for the home in cash and still use a construction loan. Your construction loan can also be taken out from a different bank or lender than your mortgage.

During construction, your home is built or renovated over a course of time. During the different stages, your contractor or building company is paid through progress payments. They will often get paid a portion when the job begins and then again after a new phase has been completed. This is to help ensure the entire payment isn’t given at once when the job actually hasn’t been finished.

While these progress payments are being made, you’re paying your monthly installment payments to your lender. Before finalizing your construction loan, you’ll agree upon a repayment period and interest rate to make sure the loan payments fit within your budget. You’ll be approved for a construction loan using your assets, income, and credit score just as you would with a traditional loan or mortgage.

Why Use a Construction Loan?

A construction loan is a great way to pay for a renovation or a building project over a period of time. While these are still considered short-term loans, it allows you some flexibility when it comes to payments. You’ll also be able to keep more of your own cash in case of emergencies.

How Do Bank Construction Loans Work 101

If you’re asking, how do construction loans work? You’ve come to the right place. From the benefits to the process, we’ve rounded up everything you need to know about getting a construction loan.

A construction loan is a great way to finance a home renovation and help ensure it’s built to your style. For more real estate and finance tips, check out the blog section for more great resources.


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