A Guide to New Construction Loans

There is a difference between new construction loans and the loans that are used to purchase homes that are already existing. In the latter type of loans, the home is used as a collateral for the payment of the loan. This means that in case your fail to make scheduled mortgage payments, then the banks will take ownership of the home, which they will sell so that they can get back the amount they loaned to you.

Since there is no home to use as a collateral since it is still to be built, the bank will have your word as guarantee for payment of the loan. However, with millions of dollars at stake, the bank will not simply hand over money for you to begin construction based on your signature alone.

The nature of the home building process makes the financing process for new home construction loan more stringent. When you are approved by a lender to borrow money for your new home construction, a schedule will be outlined again. IN this draw schedule, the lender will tell how the loan will be disbursed. Learn more about  mortgage points,  go here. 
The usual distribution of new construction loan is with 25 % increments. When you complete 25% of the construction, then 25% of the loan amount will be given to you. To ensure that the 25% work has been completed, the lender will require an appraisal of the home construction progress. Find out for further details on  how does a reverse mortgage work  right here. 

Until the original disbursement has been made, you don't need to pay anything on your new home construction loan. Then, only the interest payments will be due on the loan. This interest payment is only based on the amount that has been disbursed to you and not the total amount to be loaned.

The more you progress in your new home construction, the more loan amounts will be disbursed to you. Your monthly interest payments will increase when a huge disbursement is made. When you complete the construction, the entire balance of your loan will be due.

You might think that you will not be able to pay the loan when the construction is done. But you can pay this balance way in advance by being approved for a mortgage. To ensure mortgage approval, the new home construction lender will request an assurance letter from the mortgage lender. Take a  look at this link  https://en.wikipedia.org/wiki/Mortgage_loan for more information.

When the construction is complete, the amount of the mortgage is used to pay back the balance of the new home construction loan.