Understanding Construction Loans for New Home Builds

A construction loan is a short-term, specialized loan used to finance the building of a new home. Unlike a traditional mortgage, which is based on a finished home’s value, a construction loan provides the funds necessary to build the home from the ground up. These loans are typically required when building a new custom home, as most banks and lenders will not issue a standard mortgage until the home is fully constructed.

Construction loans are usually designed for a 12-month duration, providing ample time to complete the building process. While some banks may offer shorter terms, a full year is generally recommended to account for possible weather delays, inspection schedules, or changes to the construction timeline.

During the construction phase, the borrower typically pays interest only on the amount drawn, not the full loan balance. This can help reduce monthly payments while the home is being built. As construction progresses, funds are disbursed in stages (called "draws") to cover labor and materials.

Once the home is completed, most construction loans automatically convert to a permanent mortgage, also known as a construction-to-permanent loan. This transition eliminates the need for a second closing and helps simplify the financing process for the homeowner.

Contact Outlook Construction today for more information on construction loans or for a list of recommended lenders.