What is a Construction Loan?

At Mitchell Homes we don’t require you to get a costly construction loan for us to build your custom home. But, just because we don’t require one doesn’t mean people don’t wonder about what exactly a construction loan is, or how it differs from a traditional loan from a bank that most people are used to. A construction loan is a loan specifically meant for construction of some kind. Mind you, that’s a construction loan at its most basic. The reality of them is what separates them from your more traditional loans.

When applying for a traditional loan the banks looks into your finances to ascertain your ability to repay the loan so they know whether or not they want to take the risk of giving you the loan. All pretty standard really. While a construction loan does in many ways hinge on your ability to repay the loan, there are conditions attached to a construction loan that you don’t see with your traditional loan types.

With a construction loan there is special monitoring and guidelines that you don’t get with a traditional loan. With a construction loan, the lender can have regular checks and inspections made to ensure that progress is being made on the project. In addition, they can also require you to put up some of your money, called a “loan to cost” requirement, where they only finance part of the project, tying you more securely to the construction and reducing the odds of you walking away should there be an issue with the project.

In addition, while a traditional loan will give you the money in a lump sum once you’ve been approved, a construction loan will require you to do what’s known as a “draw”. While there are different methods for completing a draw, it all boils down to ensuring that the funds are being used for the construction project and is another way for the lender to ensure that the project is moving along as scheduled.

This is just an overview of what a construction loan is, but as you can see, it’s something that adds another layer of complication to building a home, and something that you don’t have to deal with when building with Mitchell Homes, since we’re able to build on the strength of our company. Contact us today to learn more about building your custom home, sans construction loan, with us.