Everything you need to know about building loans

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If you are looking to buy a home right now, you may have a hard time finding one that meets all of your needs. You might think about moving some of your must-haves into a nice category, but what if there was a way to bring your dream home with less compromise? One way to do this is to take out a building loan. A construction loan can be a great option for you if you are looking to move into your perfect dream home and don’t mind waiting for it to be built.

What is a building loan?

A housing loan is a loan that helps cover the cost of a brand new home. Typically, you will need to take out a mortgage after the home is built, however, here at Arbor Financial Credit Union, our housing loan also includes the mortgage phase. Having both the construction phase and the mortgage phase included in your loan means a closing process. A single closure means lower fees, less red tape, and faster project completion.

What does the building loan process look like?

Once the loan is approved, you will need to provide the lender with a construction schedule, detailed plans, and a realistic budget. When your timeline and other materials are cleared, the lender will pay the loan to the contractor in stages that follow the construction schedule.

For example, a payment (tie) can occur when the framing of the house begins or the roof is put on. During the construction phase, you will only have to pay interest on your loan. While building the home, the lender can bring in an appraiser to inspect the home and make sure the work being completed complies with the code. If you are working with Arbor, once your home is built, your loan will automatically convert into a mortgage and full payments will begin.

What does a building loan cover?

A construction loan can be used to cover most of the construction costs. This could include: the cost of the land, the contractor’s labor, building materials and permits. In some cases, permanent fixtures, such as appliances and landscaping, may also be included.

Important things to know:

Typically, rates change throughout the life of the housing loan, but with the Arbor Financial Building Loan, you will have a fixed rate for the duration of the loan. Your rate may be slightly higher than a traditional mortgage due to the lack of a completed home as collateral. Since your lender pays the contractor directly for the work done during the construction phase, you will not receive any extra money at the end of the construction phase. Fortunately, you only pay for the money the lender paid the contractor. Hence, you will not have to pay the original loan amount if you are under budget, just what was given to the contractor.

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