Browsing through existing housing inventory often inspires buyers to build a dream home of their own. While paying cash or using a line of credit such as home equity are options to finance such a project, construction loans are most common. A construction loan differs slightly from a traditional mortgage however has many benefits for the buyer and is our preferred financing option. 

What is a construction loan?

A construction loan is a short-term loan, typically 12 - 18 months, that covers the construction costs before long-term funding or mortgage takes effect. This money covers materials, labor, and land acquisition if you do not already own a buildable property. 

There is an initial payment by the lender to purchase land, if needed, and start permitting, with approximately four to six subsequent payments (or 'tranches') that the bank will disburse throughout various construction milestones. 

Construction loans are short-term financing that cover land acquisition and the building process and often convert to a traditional mortgage once construction is complete. A mortgage typically range from 10 to 30 years with either fixed or adjustable-rate principal and interest payments.

 At Welcome Homes, we implement a simplified 'one-closing' process where our customers close on a construction loan that automatically converts to a long-term mortgage. Our streamlined procedure provides customers with long-term financial planning assurance as they have a sound idea of estimated payments over their loan period before their home build is complete. 

What are the benefits of a construction loan?

  • Short-term agreement. Home construction loans are short-term agreements, typically lasting 12 - 18 months, meaning lower total interest payments than long-term loans such as mortgages.  

  • Interest-only during constructionConstruction loans only charge interest on the amount of the loan used during construction. In contrast, mortgages charge borrowers interest on the entire loan sum.

  • Guidelines and tranches keep your project on track. Payments made by lenders at 4 - 6 phase milestones keep your construction on a controlled timeline. Before disbursement of funds at each milestone, the home is inspected to ensure the house is being built to code, providing homeowners with confidence about the construction quality and keeping the construction team on track.

  • Ability to transition to a permanent loan. Any remaining costs of construction can be paid down by acquiring a mortgage on the home once it's completed. Your mortgage terms, after transitioning from a construction loan, will vary from lender to lender, but will generally last for 9, 14, or 29 years, depending on your interest rate and monthly payments. With Welcome Homes, your construction loan will automatically convert to a traditional mortgage of your choice, with no need for an additional closing meeting.

Construction loans are similar to regular mortgages with a few extra benefits! Our experienced team and partners at Citizens bank will work with you directly to make your dream new construction a reality. 

Repaying construction loans

There are a few options for paying back a residential construction loan.  

  1. End loan: You will get a new loan to pay off the construction loan once the construction is complete. 

  2. Refinance: You take out a new loan, likely a permanent mortgage. When you work with Welcome Homes, your construction loan will automatically convert to a traditional mortgage of your choice with no additional closing costs.

  3. Pay outright: You will pay the entire loan by construction completion. 

Calculating payments 

Your construction loan is disbursed in installments according to the terms laid out in the loan agreement based on the building schedule. At predetermined building milestones, the lender will draw from the loan amount to pay the builder and as opposed to mortgage payments, monthly payments on a construction loan are interest only and calculated based on the funds drawn at that given time.  

Sample payment schedule 

The loan is a percentage of the appraised value of the home and your down payment will be at least 10% -  20% of the appraised value, dependent upon factors such as  loan amount and buyer’s credit score. For instance, if the home is appraised to be worth $900,000, the lender will loan you $900,000 x (80% as an example) = $720,000. 

The first disbursement from the lender will include: a 10% (of the contract sum) deposit to the builder; and if land is being purchased, the balance for the acquisition of the land after the downpayment has been paid to the seller. 

Loan: $720,000         Interest rate (annual): 6%         Monthly interest rate ( 6% ÷ 12): 0.5%

At the end of the construction period, you will either pay the principal in its entirety to the lender, or more commonly, transition to a permanent mortgage with fixed monthly principal and interest (P&I) payments. 

Additional fees to keep in mind. The fees for the lender-appointed inspector who evaluates the quality of the builder’s work at different milestones are to be paid by the buyer upfront to the lender to cover approximately 5 - 6 inspections. The difference will be refunded if the builder requires fewer inspections than the buyer has paid for. The fee for the final inspection is collected separately after the certificate of occupancy is obtained. 

Below is a detailed timeline to show the steps to secure a construction loan for a Welcome home. 

  1. Gather documents, including architectural plans, pricing, and personal financial information. Our team of experienced architects will provide architectural plans and accurate pricing. You will need to provide documentation showing that you can provide a down payment (typically 10 - 20%)  and continue paying the loan and interest. As you gather the required documentation and find a licensed builder, keep in mind that you will need:

    1. Good to excellent credit

    2. Enough income to pay off the loan

    3. A low debt-to-income ratio

    4. A downpayment 

    5. Detailed project and construction budget approvals

    6. Builder contract approval

  1. Get pre-approved. The pre-approval process determines how much you can borrow from the bank. If you are not approved for the amount you hoped for, you can try a different lender or work with our team to figure out how to lower your construction costs.  

Closing on your new home

Closing on a home, newly built or existing, is essentially the same process: The appropriate documents are signed to transfer ownership of a property to the buyer. 

With a new-construction home, inspections are conducted throughout the building process by both the builder and local inspection entities to ensure the home meets all code requirements. Once construction is complete, the builder will conduct a final walk-through and orientation with the buyer approximately a week from closing. 

When you build with Welcome, you will simultaneously submit a land offer and sign a Welcome Homes building contract. Once the land offer is accepted, customers close on both the land and the new construction build in one closing. Our process allows you to fully immerse yourself in the final walk-through of your new home without concern for a separate closing and associated costs. 

Understanding our streamlined one-closing transaction process

  1. After finding the ideal location for your new home, make an offer to purchase a parcel through your agent (if you do not already own the land). Simultaneously, you will complete a building contract with Welcome Homes. 

  2. Once the land offer is accepted and financing secured, you will close on both the land and the home in one closing process. 

  3. Approximately seven months after the construction permits are issued and your home receives its certificate of occupancy, the construction loan automatically converts to a mortgage, eliminating the need for a second closing.

Our one-time closing process saves you time and energy. We work with you every step of the way to make sure your finances are in place to build and maintain your new Welcome Home. 

Our hands-on team is always available to answer any questions and guide you through the entire construction loan and closing process. By following these steps, you can receive the funding to start building your dream home with Welcome. 

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