Construction Vs. Conventional Loan: What Buyers Need to Know

If you’re ready to buy a home or are considering an investment property, it can take time to decide whether a construction or conventional mortgage suits your needs better. Here, William Collins explains what you need to know to make your decision.

Consider Your Vision

If you’ve found the perfect property and want to make some changes after the purchase, you’ll likely want to go with a conventional loan over a construction loan. A construction loan will make the most sense if you’re more interested in fully renovating a property or building something from the ground up because you have yet to find the perfect home.

Have a Plan

If you’re applying for a construction loan, you’ll need to have a clear plan of how you’d like to build or renovate to boost your chances of approval. Suppose you already know what property you want and are considering doing construction after settling. In that case, consider taking out a conventional mortgage for the time being and taking out a construction loan down the line. You may also want to talk with potential lenders about their interest rates and loan processes to help you decide what option will best fit to make your plan a reality, recommends William Collins.

Think About Funding

When you take out a conventional mortgage with a bank, the total amount of the home will be paid in a lump sum. This is different from a construction loan. When you take out a construction loan, you’ll get the money you’ve borrowed in stages as you work through the completion of the project. Typically, a construction loan officer from the financial institution you’re borrowing money from will come to the job site to approve the disbursement of funds.

Construction Risk Means Higher Interest Rates

Generally, you can expect to pay more interest on a construction loan than a conventional one. Since you’re more likely to run into issues during construction than simply purchasing an already-standing home, financial institutions safeguard themselves against loss by boosting interest rates. A conventional loan makes the most sense if you’re looking to get the best deal and pay the least interest over time.