Residential Loans: Construction Loans
What is a residential construction loan?
- For individuals looking to build their own home, they’ll likely need a construction loan (sometimes called a “self-build loan”).
- Compared to a purchase loan for homes that are built already, a construction loan usually comes with higher down payment requirements and higher variable interest rates – since the house doesn’t even exist yet, there is more risk to the lender.
- Due to this risk, lenders will require a lot of upfront paperwork, including project timetables, budgets, and detailed floor plans.
- During construction, the lender will pay the builder in installments (or “draws”) as each construction phase is completed.
Sample residential construction loan programs
There are two main types of construction loans:
Construction-to-permanent loans (“one-time close”, “single close”, or “all-in-one” loans):
- After the short-term construction loan ends and the home is completed (the typical term is one-year, interest-only payments), the loan automatically converts to a permanent mortgage.
- With this type of loan, the borrower may be able to lock in a maximum interest rate for the life of the loan, and only has to pay closing costs once.
Stand-alone construction loans (“two-close” loans):
- This type of loan (usually one year, interest-only payments) must be paid off when the home is completed, when the borrower will likely have to take out a mortgage (sometimes called the “end loan”).
- As such, the borrower will have to re-qualify for a new loan, go through a second closing and pay another set of closing costs.
Sample success stories
To see how we’ve helped individuals obtain residential construction loans, go to our “Success Stories” page and filter by “Residential Construction Loan”.