How Do Construction Loans Work?

A couple with construction hats on, looking at a blueprint together

If you’re thinking of building a home, you may be wondering how financing works. Get answers to frequently asked questions and learn about available construction loan options here at PSECU.

How Do Mortgages Work for a New Build?

When you’re building a home, your mortgage process will depend on whether you’re purchasing the lot and the home together or separately.

  • Buying the lot and the house together. If you’re buying the land and house together, the mortgage process is typically a bit easier. You apply for a mortgage, and you go to closing when the house is near completion or totally done. The process in this case works very similarly to a mortgage for an existing home. 
    • Potential borrower applies for a mortgage.
    • Lender qualifies the borrower.
    • The future home is appraised based on the plans and specifications provided by the builder/developer to determine the mortgage amount.
    • Lender approves the borrower/mortgage and gives the borrower a commitment letter that they can provide to the builder.
    • When the house is near completion, the member contacts the lender to notify them. The lender then schedules closing and sends an appraiser to ensure the house was built the way it was supposed to be done.
    • Borrower takes ownership of the home after closing and begins making mortgage payments.
  • Buying the land and the house separately. If you’re buying the land and the house from separate entities, there are a few more steps to the mortgage process, but our mortgage consultants are here to help you every step of the way.

Once you find a lot to purchase, closing takes place. If you don’t already have plans for a builder, you may need to get a land loan specifically and then later convert this into a mortgage when you’ve secured a builder.

If you already have a builder lined up, you can cover both transactions at this initial settlement with a construction draw loan.

For a construction draw loan, the steps below outline the typical path:

  • Potential borrower applies for a mortgage.
  • Lender qualifies the borrower.
  • The future home is appraised based on the plans and specifications provided by the builder/developer to determine the mortgage amount.
  • Closing takes place and funds for the cost of the land are disbursed.
  • Construction begins on the home. The builder can request draws from the mortgage to cover costs for each phase of building. Along the way, the builder will need to submit plans to the lender who sends out an appraiser to verify that the steps are completed following the agreed-upon specifications.
  • As the home is built, the only payments the borrower makes are interest payments on the amount that has been drawn to date. Once the home is complete and/or the draw period has closed, the borrower will begin making payments on the total of the loan (principal and interest). There is no additional closing.

Please note the processes outlined below reflect PSECU’s practices and may vary by lender.

How Long Can You Have a Construction Loan?

While it may vary by lender, here at PSECU, our construction loans typically offer borrowers and their builders 12 months to draw on the loan. If all the funds aren’t drawn by the end of the 12 months, we advance the remaining amount, placing the funds into a holding account for the member. At that point, the member is required to start making payments on the fully drawn amount.

Can I Choose Any Builder I Want When Building a Home?

When financing a new build, the lender may need to approve the builder before construction begins. Here at PSECU, this is only the case if you’re getting a construction draw loan where we’ll be disbursing funds directly to a builder. This process helps ensure that the home will be built to the specifications provided, leaving the buyer and lender with a home that is worth the appraised amount.

If you’re buying a new build in the first scenario outlined above (where you don’t close on the house until the home is near or at completion), you don’t have to have the builder approved.

How Do I Apply for a Construction Loan?

Applying for a construction loan is just like applying to purchase an existing home. Instead of another homeowner being the seller, the developer or builder is the seller. To make sure you have everything you need, we recommend speaking to one of our mortgage consultants who can guide you through the process.

What are the Perks of a PSECU Construction Loan?

As with all our mortgage options, our construction loans offer lower closing costs than many lenders. We service our loans in-house. And we have adjustable- and fixed-rate mortgages available, as well as various term options, to help you find a mortgage that fits your budget. Plus, we don’t charge higher rates simply because you’re building a home. You have access to the same competitive rates that buyers of existing homes enjoy.

Build Your Financial Home with PSECU

Our mortgage consultants are experienced professionals who are ready to help you finance construction of your dream home. Contact them today to discuss your options and learn about all the other perks of being a PSECU member by calling 800.237.7328 ext 3878.

Get Moving with a PSECU Mortgage

The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Some products not offered by PSECU. PSECU does not endorse any third parties, including, but not limited to, referenced individuals, companies, organizations, products, blogs, or websites. PSECU does not warrant any advice provided by third parties. PSECU does not guarantee the accuracy or completeness of the information provided by third parties. PSECU recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.