Do You Need a Construction Loan?

You have finally decided to handle your house’s construction but are in a rut on what to do first. Many first-time buyers – and in your case, first-time house builders – fall into the wrong notion that building your property is more exciting and more advantageous. What you don’t realize is that there are additional requirements you need to satisfy initially so that your house building project will be a success.

The first thing to consider doing is finding a mortgage loan that will fit your budget and shoulder your operating costs. There are several mortgage professionals to choose from but not all of them are willing to extend you the necessary funds to jumpstart your house construction. You will eventually learn that there is a “special” mortgage product specifically designed for people like you who want to oversee their house building project: this is referred to as a construction loan.

In this blog, you are going to learn what a construction loan is and how different this is compared to other conventional mortgage platforms. If you are ready to dig up dirt then shovel in and start learning about construction mortgage.

Construction Loan Defined

When you thought about getting a mortgage loan, you probably already had a certain amount of funding planned to support your construction project. However, you might not know yet that not all mortgage loan packages are the same, and not every type of mortgage plan will fit your needs.

One of these loan types is a construction loan and it is defined as a type of loan that helps fund a house build, home renovation, or land purchase. With this in mind, you are now in a position to know how to get a mortgage to build a house without second-guessing anymore.

Mortgage Loan Defined

You have to be able to draw a line between conventional mortgage loans and construction loans. As such, you also have to know what a mortgage loan is which, by definition, comes as a type of loan that a borrower uses to maintain a house or other kinds of real estate properties that he or she agrees to repay at a specified date – one year or more – depending on what is stipulated on the mortgage contract.

Notice immediately that a mortgage loan is used to maintain a house while a construction loan is used to fund a house building project. From these two definitions, you can already glean a huge difference between the two not only in the structuring of the contract but also in the execution of its terms and conditions.

Construction Loan Requisites

Now that you have a clear idea of what to expect from a construction loan, the next thing to learn about is its requirements to get your ground-breaking experience less stressful. Most first-time house builders fall into dismay after realizing that they “made a big mistake” in managing their property’s erection but this is just their egos kicking in and telling them that they are a failure in owning their own homes.

Once you get to identify what construction loans require, you can be assured that building your dream home is not as complicated and as tedious as you thought it was. You also acquire a keen sense of determining what best construction loan agencies will provide you with their best offer to lift your house construction off the ground.

The following are the requisites you need to understand before the acquisition and during the execution of your construction loan contract:

a. Payments – construction loans typically require you to settle interest-only payments only based on your outstanding loan balance. Most of the time, your payments will commence between 6 and 24 months after acquiring the loan.

b. Disbursements to contractors – as your house build project progresses, your builder or contractor can request a draw or partial payments for completed work. Since your house is constructed at different stages, your builder will seek remuneration after each stage is completed.

c. Temporary funding – your construction project normally will begin and end within a year. In this case, you pay off your contractor or builder and then you can reapply and use this as an ordinary mortgage loan. You have to ensure that you have enough money in the bank and your creditworthiness is excellent before your lender will allow this re-channeling of funding.

d. Construction stages funding – you can use your construction loan as payment to completed stages of your house build. You can also use this to purchase land, build garages and sheds, excavate lands, and do other property-related activities that normally require a purchase and renovate loan type plan.

e. Down payment – this is a must that all mortgage types require. Many mortgage lenders ask for an initial payment that is equivalent to 20% of your loan amount. Never expect to receive 100% of the loan because of this lender requirement. They are justified in doing this since it is also their investment that is poured into the construction of your house in the first place; hence, they deserve to be remunerated as well.

f. Fool-proof plan – you have to prove yourself to be worthy of your lender’s trust and this means having a good credit standing, reliable source of income, and a stable job to ensure that you will not skip on your payments when it becomes due.

g. Lender-approval – banks are often your construction loan lenders; hence, you have to present them with a plan that guarantees a real construction deal between you and the loan provider. Failing to satisfy this requirement will put your house build on hold and could place your construction loan application in jeopardy.

Final Thoughts

Leading your house construction project is ideal if you have the funds and the people to support your endeavor. However, there is a big difference between an ordinary mortgage loan and a construction loan. You have to learn initially how the latter works and its requirements before diving into your project and ending up drowning in debt. Do your research on reputable construction loan companies but be on the lookout as well on fraudulent contractors or builders who will not stop at anything to steal your money. Be vigilant and rest assured your housing project will be an elegant success.


Dominion Lending Oshawa is a trusted financial company that has helped 96 clients materialize their dream homes in Canada. Our vision is to help families build, develop, and/or improve their homes for them to live conveniently and comfortably.
Call 416-825-0142 or email dominionlendingcentres@oneteamservesyou.com today to learn more.

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