What are Residential Construction Loans?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 31 January 2020
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Residential construction loans are loans designed to aid in managing the costs associated with building a new home on a piece of real estate. Depending on the nature of the residential loan, the homeowner may be able to defer a portion or even all of the payments on the outstanding balance until the construction is completed. Loans of this type are attractive to consumers who want to purchase an undeveloped housing lot and build a new home, rather than purchase real estate that already has a house on the property.

With residential construction loans, property owners are able to manage all the expenses associated with the building of a new home without the need to incur out of pocket expenses. Proceeds from the loans can be used to pay for contracting costs, building materials, and anything else that is connected with constructing the home in compliance with local building codes. This can be especially important if the owner needs to divert his or her personal resources to renting temporary living quarters for the duration of the construction period.


There are several different ways to go about structuring residential construction loans. In some cases, it is possible to bundle the purchase of the property into the overall balance. This is particularly true when the goal of the owner is to roll the loan into a traditional mortgage once the construction is complete. Using this strategy means that the owner can deal with a single debt obligation rather than managing a mortgage while also paying off the construction loan.

As with any type of loan arrangement, borrowers want to lock in the best interest rates and terms possible for the residential construction loans. This often means talking with several different lenders to note only identify the best possible rate, but also determine who offers terms that are within the means of the debtor. One key factor to consider is how soon payments on the loan must begin after the actual construction gets underway. In some cases, lenders may require nothing more than payments on the interest for the duration of the construction period. Once the home is completed, inspected, and approved by the local housing board or similar jurisdictional office, the owner begins to submit payments on the principal.

A popular option in many areas of the world allows owners to roll or convert residential construction loans into mortgages once the home is completed. In some cases, this allows the homeowner to actually lock in a better rate of interest, depending on the current market value of the property involved. At other times, this option is not included, although the owner may be able to obtain financing from a mortgage lender to pay off the construction loan and implement a first-time mortgage with relatively little trouble.



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