The submarkets of north Rio Rancho, northwest Albuquerque, north Valencia and many other communities around New Mexico have recorded high records of start permits this year. With a limited supply of homes in the city of Albuquerque — homebuilders and homeowners have gravitated to new construction homes. This article explains what a construction loan is, construction loan timelines, and how these types of loans work.
What are construction loans?
Traditional home loans are based on the fair market value of the home, which is determined by comparing its condition to other homes recently sold in the area. In contrast, construction loans are based on the projected value of the new home upon completion. Construction loans generally have a shorter term and higher interest rate applied than traditional mortgage loans.
The two most sought types of construction loans are:
Construction-to-permanent loans: If you know when and how you're going to build, this is the loan for you. With construction-to-perm financing, the lender pays your contractors while work is underway. The loan then converts to a more traditional mortgage once the project completes, the interest rate is secured upon closing of the construction loan and no additional loan is needed.
Construction-only loans: Construction-only financing requires that the loan be paid in full once construction is completed. These loans are most often obtained by borrowers who have savings set aside or plan to use profits from selling their current home. After the construction loan is paid off, often a traditional mortgage can cover the remainder of the cost.
How do construction loans work?
Construction loans are different from traditional home purchase financing in that the cost of the house is paid out over several phases during the build. Each phase of construction is financed with a structured installment payout linked to the expenditure. The lender provides an upfront payment to the builder so that they may begin work on the project. Then, at set intervals (also known as "draws"), installments are paid to allow the builder to cover expenses for each stage of construction. The frequency and amount of these payments, commonly referred to as "draws," are determined by the lender, builder, and borrower.
Before each payment (draw) is made, the lender consults with an inspection service to verify expenses throughout that phase of construction and ensure that the project's timetable remains on track. When work is finished, the contractor receives the final draw money. The expense is then transferred to the buyer at closing.
Advantages of new construction financing with Avance Group
When you’re ready, talk to an Avance Group loan officer about your new construction financing. Whether you're looking to finance your dream home or a second property, our construction loan options may be right for you. With low down payment options of as little as 10% for primary purchases and 20% for secondary homes, we can help make your homeownership goals a reality.
With our loans, you'll have reduced costs because there is only one set of closing fees and you won't accrue any interest during the construction phase. We'll also provide you with a fixed-rate loan for up to 30 years with a one-time float down option, as well as an upfront rate lock. Avance has helped clients throughout New Mexico realize their dreams of homeownership. Speak with someone today to get pre-approved and started on your new home.