Understanding home construction loans

Posted by Skowhegan Savings on July 1, 2022

What is a Home Construction Loan?

Home Construction loans enable you to pay for your new property while it is being built and can help you to keep more money in your pocket each month.  Many lending institutions require you to have a General Contractor approved by the bank to build on land you own or will purchase.

A home construction loan will fund:

  • Permitting
  • Building materials
  • Construction work
  • Finishing work, such as kitchen countertops, exterior paint, landscaping, etc.

Your builder will want a schedule of disbursements at pre-agreed stages.  A bank-approved home inspector will need to approve work in progress before the money is disbursed.  Funds need to be available when payments are due, and that is where the construction loan plays its part.

Home Construction loans are considered a little riskier than traditional mortgages because there is no existing home to act as collateral in case of a failure to pay or if the builder goes out of business and fails to complete all the work.  

When everything is agreed upon, the lender and builder create a draw schedule indicating when each stage should be completed.  The appraiser will confirm each stage is completed, enabling the bank to authorize payment to the builder.  At Skowhegan Savings, the borrower will only be charged interest on the amount paid out during the first 12 months if private mortgage insurance is not necessary on the build.   When the 12-month construction period has expired, the loan will automatically convert to repayment of principal and interest.

How to Get Approved for a Construction Loan

Aside from a credit check, acceptable debt-to-income ratio, regular income, etc., construction loans also require:

  • Have floor plan and materials list ready to pass to your loan officer
  • Have a contract in place with your builder which includes overall costs and the expected building timeline
  • We appraise the building plan to confirm the finished property value, so we can agree on a loan amount of 80% of the appraised value or 95% with private mortgage insurance

Once your home is completed, a certificate of occupancy is issued to confirm the home complies with Maine's Building and Energy Code.  We have a one-close construction loan and you are locked into the rate the day you make the application.  The loan automatically converts to principal and interest payments after 12 months.  If private mortgage insurance is required you would pay principal and interest payments 30 days after closing.

At Skowhegan Savings we have working relationships with many Maine builders and will work with them when arranging your loan.  If you are considering building a new home and would like to discuss your options with one of our loan specialists, contact us today! 

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