Understanding New Home Construction Loans

September 20, 2019
Integrity First Lending

Do you want to build a house? A new home construction loan can provide you with the funds you need.

Unlike a standard home loan, which often comes with a 15-year or 30-year term, a construction loan has a much shorter lifespan – the term is usually a year or less, however long it takes for construction to be complete. At that point, you switch to a traditional mortgage.

Lenders offer two types of new home construction loans. Here, the Integrity First Lending team explains the difference between stand-alone and construction-to-permanent loans and how to qualify for the financing you need.

Utah construction loan programs

Stand-Alone Construction Loans

A stand-alone loan covers just the costs of building a house. The lender offers an advance for the home construction expenses, and while the work is being done, you pay only interest. Afterwards, you take out a traditional mortgage to pay off the construction debt.

If you own a home you plan to sell, a stand-alone loan may be a smart option. After selling, you should have a larger down payment, which could help you secure more favorable terms and allow you to avoid paying private mortgage insurance. However, when it’s time to transition to a traditional mortgage, there’s a chance you could face higher interest rates.

Construction-to-Permanent Loans

A construction-to-permanent loan covers home building costs, then converts to a traditional mortgage. Your payments remain constant the entire time with this type of financing, and you don’t have to worry about qualifying for a mortgage after the construction work is complete.

With a construction-to-permanent home loan, you can choose from a fixed-rate or adjustable-rate, and most lenders offer a term length of 15 or 30 years. Going with this type of financing can be more convenient, which is why most people prefer it over a stand-alone loan.

Qualifying for a New Home Construction Loan

Many banks and financial institutions are leery of offering new home construction loans. After all, they aren’t backed by collateral – so lenders take a greater risk by providing financing for a new home build.

To protect themselves in the event of poor building practices or falling property values, lenders often impose strict qualification requirements. These usually include:

  • Using an licensed general contractor with experience building homes
  • Providing detailed project specifications, a construction timeline and a practical budget
  • Putting down at least 20 percent to ensure you are invested in the project

If you meet these conditions – and you have both a solid credit score and a reliable source of income – you should be able to qualify for a stand-alone or construction-to-permanent home loan.

Are you ready to find your ideal financing solution? To explore your new home loan options, turn to the professional team at Integrity First Lending.

Our highly trained and experienced loan officers can answer your questions, offer advice and help you find the funds to build a house in northern Utah. For more information on new home construction loans, contact Integrity First Lending today.

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