Residential construction loans are not as easy to get as many other loans. They are quite complex and not all banks and financial institutions offer them. Residential construction loans are taken out by individuals who are having their homes custom built by a builder. Before you apply for a residential construction loan, however, you need to do a bit of research.
The first step is to decide on which bank you will get the loan from. Many people will hire the builder first, discuss the plans for their home with them, and have the builder draw up the plans. While you do need to do this before you actually apply for the loan, the reason you should choose what bank you will work with before choosing the builder is that often banks have a list of what builders they will work with. With residential loans, the bank puts the money it is granting you into an account which the builder will then access to build your home. You do not have direct access to that money. If you already know what builder you want to build your home, ask the bank if this builder is approved by them.
There are a few banks and finance institutions to choose from so take your time and choose the place that offers the terms that are best for you and your situation. Study the lenders terms, conditions and rates very carefully and make sure to ask any questions you have.
You should also already know if you are going to be living in the house either short term or long term, or whether you are selling or renting the house. The bank will want to know what your plans for the home are and this will affect whether you are granted the loan and how much money you are granted. The bank will want this information along with the building plans that you and the builder have drawn up, as well as the cost estimates that the builder has done. It is very important to make sure to get the costs just right as after you turn them into the bank you can not take them back and redo them.
Once the loan is granted, as was mentioned above, the money is put into a bank account that can be accessed by the builder. The builder can not access the money all at once, however, he can only get it incrementally as he progresses through different stages of building the house. These stages should also be mapped out on the building plan and estimated building costs that you give to the bank when you apply for the loan. However the last payment will not be released to the builder until an appraiser from the bank has looked over the completed house and made sure that everything is well with it.
It is also very important that you are aware of how the interest rates on the residential construction loan work. Residential construction loans are very different from mortgage loans in that you do not get a fixed rate. While you can change the residential construction loan into a mortgage once the house is finished and then change the interest rates into a fixed rate, while the loan is still a construction loan you will be paying an adjustable interest rate. The rates go up and down depending on the market, so you will need to be prepared for this and work out your budget in such a way that you are able to make the monthly payments no matter how the rates may fluctuate.