How to build your dream home with a construction loan

By PeterLogan

How to build your dream home with a construction loan

Are you able to visualize your dream home? The real estate market may not always offer the perfect home. But that doesn’t mean that you should give up or settle for less than what you want. You can customize your home using construction loans. However, a loan to build a home on a parcel of land is very different to a mortgage to purchase an existing home. It is important to learn how construction loans work before you get started.

Standard mortgages are obtained for a house. A mortgage allows you to pay monthly principal and interest on your house for a long time, usually 15-30 years until you get it fully.

A construction loan is generally obtained in two parts. The first is a one-year loan, which will only be used for interest. This is used to build the house. This is typically divided into smaller payments called “draws,” which go to your contractor to construct the house.

After the house is finished, the loan can be converted to a permanent mortgage loan. This is a traditional loan, in which you will pay principal, interest, and property taxes over the long-term until you own the house fully. It works the same way as a standard mortgage.

The lender will keep you informed of progress and ensure that your contractor is meeting all requirements. The builder will be just as concerned about this as you are. Your finished house will serve as security when your construction loan is converted to a permanent mortgage.

It can be more difficult to build a house than it is to buy one. For example, delays in building can be caused by weather or shortages of materials. You and your lender should carefully consider the timeline, costs, fees and possible delays. Additional funds should be set aside to cover potential overruns.

Getting Started

Before you decide if a construction loan is something you are willing to take on, it is important to fully understand the details.

The requirements for construction loans include financial qualification, a review of your plans, and a detailed review of the contractor. Working with a local lender such as CBC Bank can prove to be beneficial. We take the time to get acquainted with you and your plans. Then we guide you through the entire process to help you realize your dreams. You will know what you can expect, how to qualify and what you should be aware of as you build your dream house. A local lender is familiar with the area and can recommend builders to you. You can get advice from them about what to look for when selecting a homebuilder that suits your needs.

Qualifying and Preapproval

Before you start planning your dream home, get preapproved. You can find out the type and amount of loan that a lender will approve by prequalification. You could end up paying a lot of money for blueprints, plans, specifications and plans that you don’t need if you proceed without prequalification.

Construction loans require more preapproval than standard mortgages. Standard mortgages have the house as collateral. Construction loans don’t provide security until the house has been completed. This means that the lender does not have any collateral.


The lender will require the following documentation to be presented to when you apply for a loan construction.

  • Your proof of income (or your salary)
  • Statements from banks
  • History of employment
  • Proposed down payment
  • Credit score and credit history

These documents are required for standard mortgages.


Pre-approval will also require documents relating to construction and suitability.

  • Plans
  • Specifications
  • Blueprints

Lenders might also request financial information from the builder, including profit and loss statements or cash flow statements, lengths of business, licensing and other documents.

Find the right lender

The right lender can make all of the difference when you are building your home.

This lender will be your partner for a long time. It is important that you choose a trusted one. Experienced lenders will have a wealth of knowledge about construction loans and be able to provide reassuring answers for any questions.

A community bank is a better option because they are more familiar with the local market, construction processes, and people. You can get more local advice from them regarding qualified contractors and possible delays in building construction.

Questions to ask a potential lender

It is important to ask questions as not all lenders and banks are the same. Different lenders might have different requirements or offer different types loans. Open-ended questions are:

  • How have you found construction loans and the entire process?
  • Rates are currently low – can you offer a fixed rate product or option?
  • How do you manage the permanent mortgage loan after the construction loan?

Some lenders do not offer mortgage and construction loans. A lender like CBC Bank that offers both construction and mortgage loans can help you save time and money on appraisals and fees, as well as in closing costs. You can also feel secure working with people who know you well and are familiar with your circumstances throughout the entire process.

Ask about terms and interest rates. Interest rates are currently very low so ensure that the lender offers a fixed-rate product. You can also track interest rates via RateWatch if you are not ready to begin the loan process right away. This allows you to keep up to date while you house hunt or make a decision on a construction loan.

Loan and Building Process

Construction loans can be used to finance the construction process. You must remember that construction loans are first used to pay for the building process. As the home is constructed, payments will be made.

Locate a Builder

Finding a trustworthy builder is a key step. To be able to hire a builder certified, you will need to have house plans.

This is an important step as the partner will be building your dream home! You must be patient while you search for the right partner. A community lender such as CBC Bank may be able to provide recommendations on reputable contractors that they have worked with in the past.

Here are some tips to help you find a good home builder.

Find local contractors. Ask friends, lenders, and real estate agents for recommendations.

As interviewers, make a list of pros and cons. What level of experience do they have? Which types of homes have these people built?

CBC Bank can help you build your dream home

  • It can be exciting to finally build your dream home after you have spent so much time planning it.
  • CBC Bank is able to help families achieve their goals, no matter if you are looking for a larger home in the South Georgia countryside and a smaller one closer to the city.
  • Customers are treated with respect by community banks. Employees and staff are more involved in the local community, so they can offer more advice and answer questions. Community-based banks are able to dedicate more time to your family than big banks when it comes to loans or mortgages. CBC Bank’s goal is to make the process of getting a construction loan as simple and straightforward as possible.
  • Our lenders will walk you through every step of the construction loan process so that you feel confident and comfortable.

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