What You Need to Know About Construction Loans

Are you having trouble finding the dream home that you’d want to buy? Perhaps you’re wondering if building a house or renovating your current one makes more sense for you and if you can take a housing loan for it, too.

You should know that the process of borrowing money for home construction is different from taking a traditional mortgage wherein you move to an already existing property.

In this post, ACB Mortgage Solutions will share everything that you need to learn about getting a construction loan:

What Is a Construction Loan?

A construction loan is a type of loan that is short-term but usually high-interest. It can provide the funds that you need to either build a home or to renovate an existing one. They usually last one year, during which the house must be completed and a certificate of occupancy issued.

What It Covers

A construction loan may be used to cover the cost of the plot of land, the building materials, the permits necessary, and the labor cost for the contractor. Home furnishings are usually not covered, although some permanent fixtures and appliances can be covered, too.

The specifics of what is included and what is not should be discussed with the lender beforehand to prevent confusion. In some cases, construction loans can include a contingency reserve, so if there are any unexpected costs during the construction, the borrower could request an upgrade.

How Construction Loans Work

Construction loans often have variable rates that could go up or down with the prime rate. The rates are commonly higher compared to a traditional mortgage. With the latter, the home acts as your collateral so if you default on the payment, the lender can get it from you. That’s not the case with a construction loan, so, naturally, lenders see them as a bigger risk.

You will have to provide the lender a construction timeline together with the detailed plans for the house. Also, note your expected budget.

When approved, the borrower will be put on a draft that follows the construction stages based on the project. You will be expected to make interest payments only during the construction period. Also, you will be paying in installments as the home progresses instead of making a lump-sum payment.

Expect the lender to send an inspector during certain building stages to check the progress and determine if the contractor needs the additional payments or draws. Depending on the type of loan and the lender itself, you might have the option to convert your construction loan to a traditional housing loan once the construction is over. This is also known as a construction-to-permanent loan. However, if what you have is a loan solely for construction, you might have to get a different mortgage to support the payment of the construction loan.


A construction loan is an excellent option for those who prefer to build a home from the ground up over buying an existing one. That said, you should carefully consider whether or not it’s the right solution for you. Also, if you’re considering getting a construction-to-permanent loan, make sure that the mortgage lender offers that, too. Also, consult with a building contractor to know how much the construction would cost. This can help you determine if you can handle the payment for a construction loan or if you would have to transition to a housing loan after. If you have other questions about mortgage solutions or are interested in getting a loan, ACB Mortgage Solutions can help you with that. Contact our team today to know how we can help you!

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