The Pros and Cons of Construction Loans

Although it’s always thrilling to move into a new residence but new construction has its special benefits. If you’re the first to reside in a house it is possible to customize its characteristics to meet your individual requirements. You have the power to alter the layout and design so that the home is entirely yours.

But, building a new house is not the same as purchasing an existing house. It also requires a new kind of loan.

What are the advantages and drawbacks of drawing down a construction loan? Let’s have a look.

Construction loans and traditional loans

In a typical house loan choose out the home you’d like and pay a specific amount to make a downpayment and then get an additional loan to pay the remainder. The lender will pay the seller the entire amount in one payment, and you repay the lender in monthly installments.

It’s not so with the case of a construction loan. In a construction loan you are able to borrow money to cover the cost of materials and labor needed to build the home, however the lender doesn’t pay it all at once. Instead, they make what’s called “drawdown installments.”

The payments are made at various stages of the construction process. There is usually an initial payment after the land is bought or when the foundation is poured or the framing is finished as well as a drawdown for work inside and the finishing and finally, a payment to cover the costs of landscaping. Each stage the lender will send inspectors to verify that the work is in line with the requirements of their company, and thus protect their investment.

It is the Pros and Cons of Construction Loans

A construction loan provides buyers the chance to take part in the construction of a house and take an active part in the construction of the home they’ll eventually live in. Since the lender will provide inspectors, the borrowers get the assurance that their house will conform to the strictest standards for construction.

If you are acting as an owner/builder, buyers may even save money by carrying out the job themselves instead of employing contractors.

A construction loan requires more paperwork and requires involvement by the lending institution. Along with the normal documentation of assets and income the person who is borrowing for construction loans will require building plans as well as forms from a reputable builder, an estimate and much more. The additional paperwork could be overwhelming for certain.