stack of brick on a construction site


Home construction loans are short-term loans that are used to pay for the construction of a new home. Once your construction plans have been finalized, there are two types of offers a lender can make you: 1. a line of credit to cover expenses throughout the duration of the construction, which then becomes a permanent mortgage when you officially become a resident of the property or 2. a permanent mortgage from the start, in which case the lender assures your builder that your mortgage payments will begin once you have been handed the keys. Most home construction loans that are granted are limited in time; the most common being no more than a year, and may also include dispersal of funds in phases. Fund dispersal is designed to ensure particular phases of the construction are complete before moving on to the next phase.

What do financial lenders look for?

Lenders are, more often than not, cautious of construction loans for the simple fact they are lending money for the construction of something with only a projected value. You can help alleviate this concern by including a qualified builder with an established home construction reputation, providing your lender with detailed floor plans, as well as materials that will be used in the construction of the home, obtaining a home value estimate from an appraiser, and, lastly, by putting down a large down payment; some lenders require as much as 25%.

Borrower best practice tips:

• Check your local zoning regulations

• Learn your building restrictions via local building codes

• Learn how much you can afford with our Affordability Calculator.