New Home Construction Loans

Building a new home can be quite an exciting adventure for those who are interested in designing their own floor plans. Getting financing to build a new home can be a challenge, especially in the tough economic times that we are currently dealing with. Unless the home builder has hundreds of thousands of dollars on hand, they will require a loan in order to build a new home. Luckily, there are programs specifically designed for those who are planning on building a new home. A new home construction loan is exactly what is needed for those getting ready to build a new home.

New home construction loans work a lot different than a typical mortgage loan does. In fact, individuals who are planning on building a new home are unable to use a mortgage loan for the construction project. The reason why a mortgage loan cannot be used for building a new home is the fact that there is no asset or collateral to back up the loan. For example, a mortgage is used to finance the purchase of a new home that is already built. If the borrower defaults on their home loan, the financial institution has the right to sell the home in order to receive their investment back. Basically, the home that is being purchased is the collateral, or asset that is used to secure the mortgage. On the other hand, building a new home will deal with no collateral, as there is no home yet to secure the loan. This is why people will use a new home construction loan to build a new home. These types of construction loans will require the builder to apply for the loan. A certain amount will be given to the borrower, but not the entire loan at once.

In other words, a new home construction loan is paid out to the builder in increments. For example, a borrower who qualifies for a new home construction loan for an amount of $250,000 will not receive the full amount. Instead, the borrower receives only a percentage at a time. A new home construction loan typically pays the borrower 20 to 25 percent of the full loan at a time. The borrower then uses that percentage to begin the construction project. Once the full percentage of the loan is used, a building inspector will assess the work that has been completed.

If the building inspector approves the project, another percentage is paid to the borrower in order for the construction project to continue. This process is taking step by step, until the entire new home construction loan is used. Many contractors use these types of loans in order to build and sell houses. However, anyone can use these types of loans to build a home. New home construction loans do not require the borrower to pay on the principle during the construction project. The borrower is required to pay only the interest payments that are associated with the loan.

Once the borrower has finished using the construction loan, and their construction project is finished, they will then be required to make the normal payments with both interest and the principle of the loan. New home construction loans have a set period of time in which the construction project will be required to be finished. Most new home construction loans will require the borrower to be finished with their construction project by 12 months. The amount that will be needed to build a new home will need to be researched by the borrower. Not every home will be built with the same amount of money that is being loaned to the borrower.