Pros and Cons Drawdown Construction Loans
While it’s always exciting to move into a new home, new construction offers its unique benefits. When you’re the first person to live in a place, you get to tailor its features to your own needs. You can influence design and landscape decisions to make the house truly yours.
However, new construction is a different process than buying an existing house. And that means a different type of loan.
What are the benefits and drawbacks of a drawdown construction loan? Let’s take a look.
Construction Loans and Traditional Loans
In a traditional home loan, you pick out a house you want, pay a certain amount for a down payment, and take out a loan for the rest. The lender pays the seller the full amount in one sum, and you pay the lender back in monthly increments.
That’s not the case in a construction loan. With a construction loan, you borrow an amount to cover the materials and labor to build the house, but the lender does not pay out at once. Instead, they pay in what is called “drawdown payments.”
These payments come at different steps in the building process. Often, there’s a payment when the land is purchased, another when the foundation has been poured, a payment when the framing has finished, a drawdown for the interior work and finishing, and a final payment to cover the cost of landscaping. At each step, the lender sends out inspectors to ensure that the work meets their standards, thus protecting their investments.
The Pros and Cons of Construction Loans
A construction loan offers buyers the chance to participate in the creation of a home, letting them take an active role in the building of the house they’ll occupy. Because the lender provides inspectors, borrowers also have added peace of mind that their house will meet the highest construction standards.
When acting as an owner/builder, some buyers can even save more money by doing the work themselves, instead of hiring a contractor.
However, a construction loan involves more paperwork and involvement from the lender. In addition to the standard proof of income and assets, those borrowing for a construction loan will also have to provide building plans, forms from a certified contractor, a schedule, and more. This extra paperwork can be prohibitive for some.
Is a Drawdown Construction Loan Right for Me?
Whatever your plans, Mortgage House has the loan for you. Contact us today to start exploring your options.