What a Construction Loan can do for you

A construction loan for a new-built home is either obtained by the homebuilder or prospective owner. In pre-recession days, small builders had greater access to capital but now must frequently put the onus on the buyer to obtain the loan. That’s one reason most new homes rising today are simply “specs” built by big, high-credit corporate conglomerates.
Let’s proceed on the assumption that you’re taking out an individual construction loan. Such loans, which can be tough to get without a previous banking history because of the lack of collateral (a finished home), have special guidelines and include monitoring to ensure timely completion so your repayment can begin promptly.
Construction loans are typically short term with a maximum of one year, and have variable rates that move up and down with the prime rate. The rates on this type of loan are higher than rates on permanent mortgage loans. To gain approval, the lender will need to see a construction timetable, detailed plans and a realistic budget, sometimes called the “story” behind the loan.
Once approved, the borrower will be put on a bank-draft, or draw, schedule that follows the project’s construction stages and will typically be expected to make only interest payments during construction. As funds are requested, the lender will usually send someone to check on the job’s progress.
Construction-to-permanent arrangement
Upon completion, which is defined by a certificate-of-occupancy issuance and full payment of contractors (and often their signatures on lien releases), the borrower’s loan liability will typically roll over into a mortgage, ideally in an arrangement where the borrower pays closing costs only once. Of late, lenders have been combining the two into a single 30-year loan with one closing, called construction-to-permanent financing. Because of the bank’s greater loan-to-value risks in these, I might add, be prepared to put a little more skin in the game: The lender may offer only 80 percent of project costs or even less. If you already own the land, that can serve as equity.
Construction delays due to weather and material/labor availability are fairly common. Be sure to build some allowances for this into the construction timetable.
More Information on a construction loan
Consumer Financial Protection Bureau
What is a construction loan?