Building Your Dream Home with a Construction Loan

Posted on 9/15/2019

Thinking about building a new house or renovating an existing home? While this can be a very exciting time in your life, you probably have a lot of questions too. Beyond what the home looks like, you need to understand if you can get a loan to build a house, how home building loans work, how much you will need to put down for a construction loan and more. Here are answers to the top questions we hear at Needham Bank about construction loans.  

How do MA construction loans work?

A construction loan is a short-term, variable-rate loan that’s used to pay for the building or renovating of a home while it's being built. Funds are released to the borrower as they complete the work. This is a popular home loan option for people looking to build a house or rehabilitate a house. A construction loan allows the borrower to get paid for supplies needed on the job to complete the work. 

What does a construction loan cover?

A typical loan for house construction extends for one year and will cover: 

  • Labor and building materials
  • Excavation
  • Permits and fees
  • Inspections

Comparing a construction loan vs. mortgage

One of the biggest differences between a mortgage and a construction loan is that with a construction loan, the lender will pay the money out in draw periods, which are based on milestones of the home construction project. Construction lenders will usually require an inspection to be done at each of these stages before paying out the draw. Since there is nothing backing up the loan in case of default, banks that offer construction loans like Needham Bank will take a good look into the architectural plans, budget, builder/contractors, materials used and home buyer’s personal finances to ensure they feel comfortable with the construction loan. 

What is a construction-to-permanent loan?

The most popular type of construction financing is the construction-to-permanent loan, which covers both the construction costs and mortgage. Some call this type of residential construction loan a two-in-one loan, or a single-close construction loan, because the homeowner will only have to pay for closing costs once and be able to roll the costs of construction into a mortgage, whether that’s a fixed-rate or adjustable rate mortgage.  Notably, home buyers only have to pay for interest on the construction loan during the construction period, and once the building period is over, the home mortgage loan begins. 

Ready to apply for a construction loan in Massachusetts?

Not every financial institution in Massachusetts offers new home or renovation construction loans. Before you draw up plans for the home of your dreams, it’s smart to get pre-qualified to find out how much you can afford to spend on construction and your mortgage. You can also get a general idea of your home mortgage budget with our Mortgage Calculator. As with all big financial decisions, you’ll also want to make sure your credit is in order. 

Known as “The Builder’s Bank,” Needham Bank specializes in construction loans and has been the area’s construction lender of choice for over 125 years. Visit our FAQs and contact our team of skilled commercial lenders to learn more about construction loan rates and how we can help you finance your dream home.