How Does a New Home Construction Loan Work in Ohio?

Construction is expensive, requiring funds that few people have at their immediate disposal. The best way to finance your next construction project is with a home construction loan from Consumers National Bank. These loans are similar to mortgages in some respects, but also quite different in a number of crucial ways. How does a new home construction loan work? Here are the main points you need to know.

What is a Home Construction Loan?

A home construction loan is specifically intended to fund the building of a new home, including the purchase of the land and the completion of the structure. The two most common types are:

• A stand alone construction loan, which finances only the building phase 
• A construction-to-permanent plan, which converts into a standard mortgage once the building is completed.

 If you take a stand alone construction loan, you could potentially apply for a separate mortgage if you need it. 

A construction loan covers the cost of the land, the purchase of building materials, the payment of contractors and labor, and the applications for all the relevant permits.

Difference Between a Construction Loan and Mortgage

Do you need a construction loan? Why not just apply for a mortgage? Well, you could, depending on what you need, but consider the following differences before you apply:

New Home Construction Loan

With a new home construction loan, the funds are paid out in stages as construction progresses. Payments usually take place in line with major milestones, such as laying the foundations, framing the house, or installing the roof. The lender usually requires an appraiser to inspect the house during the various stages. The lender will then pay the installments - known as draws - as each stage is approved by the inspector. The repayment schedule usually only starts in earnest once the construction is completed, with interest-only payments being made while the process is underway.

The approval requirements for a construction loan are quite similar to those of a mortgage: financial stability, proof of income, a down payment, and good credit. The lender will need to see a construction plan, together with a detailed outline of the project.

The interest rates on construction loans tend to be a little higher than those charged on mortgages. This is because, with a mortgage, the existing building usually serves as collateral for the loan. Since there is no existing building with a new construction loan, and therefore no collateral, the lender is taking more risk and thus needs to charge more for the loan.

Mortgage Loan

Unlike new construction loans, mortgages are paid out in a lump sum. You would have to start paying back both the principal and the interest immediately. If you are using the mortgage to fund a new home build, you will not need to have any appraisers involved. 

How to Get a New Home Construction Loan in Ohio

Consumers National Bank is based in Northeast Ohio. We have served individuals, households, and businesses throughout the region since the 1960s. We try to make the process of applying for and receiving a new construction loan as easy as possible. We offer quick loan processing and competitive rates, and we would require you to pay only the interest for up to 12 months during construction. Aside from the usual credit and income checks, we would also require a property appraisal, and the home you are planning to build would have to be for your own residence. Contact us to find out more about how new home construction loans work.