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Financing Your Dream Home with a Construction Loan

You're likely familiar with traditional home mortgages, which are used to purchase existing properties. But to finance the cost of building a new home, you'll need a construction loan. At First National Bank, our experienced construction loan officer and mortgage lenders can help make your dreams come true.

Once you've found the perfect lot or land to build your home, First National Bank is ready to assist you with the construction and permanent financing for your project.

What is a home construction loan?

A home construction loan is a type of short-term loan created for the specific purpose of financing the construction of a new house from the ground up. After the house is complete and the construction loan ends (usually one year maximum), the borrower must refinance the construction loan into a permanent term mortgage (often called an “end loan”) to pay off the construction loan.

During construction, interest-only payments are commonly made on the balance of the money you have drawn. The loan is designed to pay the general contractor who will submit payments to all subcontractors in installments based on how much of the work has been completed at each stage of construction. Subcontractors are required to provide a signed “Lien Waiver” upon payment.

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What type of home construction loan is best for you?

16-year Construction-to-Permanent Loan. This is a comprehensive loan that starts with a one-year construction loan and concludes with a 15-year term mortgage loan. With a construction-to-permanent loan, you borrow the funds to pay for the cost of building your home (maximum of 12 months construction term), and once the house is complete the loan converts to a monthly principal and interest mortgage payments for the next 180 months. During the construction phase, accrued monthly interest only is paid on amount drawn. The benefit of this type of loan is that you only have one set of closing costs to pay, reducing your overall fees.
Construction-Only Loan. A construction-only loan provides the funds for a maximum term of 12 months to complete the building of your home. At the end of the construction term, the borrower is responsible for paying the loan in full at maturity or obtaining a mortgage to secure permanent financing. The funds from these loans are disbursed based on the percentage of the project completed, and the borrower is only responsible for interest payments on the money drawn.

What can a home construction loan cover?

A construction loan covers the costs associated with building a house, from start to finish. Construction loans may cover the cost of:

Land
Plans, permits, and fees
Construction costs

Items such as home furnishings are not covered. Sometimes permanent fixtures and landscaping can be covered.

Step-by-step: Getting a construction loan

Getting approved for a construction loan requires a team effort between you, your realtor, your builder, and our construction loan officer.

Meet with our mortgage and construction loan team. When you are considering building your home, the first step is to set up an initial meeting with our mortgage and construction loan team to discuss the process from beginning to end. We offer several options to meet: in-person at any of our bank locations, via video conference, or by telephone.
Hire a Pro. The next step would be for you to find a reputable, licensed home builder. There may already be a builder(s) working on homebuilding projects in the area where you wish to build. It is wise to compare different builders to find the expertise and price that fits your needs. Contacting your local homebuilder’s association is a good place to start to find contractors in your area. Be sure to check references and their business credentials.
Complete the Loan Application and Get Prequalified. Getting prequalified for a construction loan can provide you with an estimate of how much you may be able to borrow for the construction project and eventually a mortgage loan. Prequalification helps keep you grounded to a budget you can afford. The maximum loan amount is 80% of appraised value, which includes the lot and improvements.
Secure Your Building Contract. The next step is to secure a contract with your builder (and architect, if needed) that includes detailed pricing and plans for the project. This information will be required by the bank during the application process.
Final Loan Approval Process and Closing on Your Construction Loan. After identification of your property and the homebuilder contract is secured, underwriting for your construction loan can begin. During this step, the information in your application will be verified, your loan rate can be locked in, and initial disclosures will be provided to the borrower. Once the borrower agrees, the loan request can proceed.
Break Ground on Your Next Adventure. After closing, construction can begin. Your builder will work directly with your construction loan officer to pay for the building costs during each stage of construction.

Choose a lender you can trust

First National Bank is a community bank that has been around for more than 100 years. We have helped thousands of families realize their dreams.

It also means we work closely with local contractors, architects, designers, appraisers, and real estate agents in the communities we serve. These relationships give you a head start when it comes to getting a construction loan.

Our friendly, knowledgeable staff are experts in mortgage and construction loans. Their guidance will be imperative to you throughout the loan process. They will explain the loan procedures and construction loan rates, terms, and requirements; and help ensure you are getting the best loan for your situation.

Vicky Halvorsen