Getting a Construction Loan to Build or Renovate Your Home

A construction loan can be used to cover the costs of building a new home or renovating an existing home. Understanding the basics of how a construction home loan works can help you plan and make the best financing decision for your project.

What kind of projects are best suited for a construction loan?

Whether you're a first-time homebuyer or an experienced homeowner, a construction loan can be as unique as the project you're financing. Some projects that are good candidates for a construction loan include:

New home construction:

  • A new home purchase where the builder requires payment in installments as the home is being completed
  • Building a home on a lot you already own

Home renovations:

  • A purchase of an existing home that requires renovation
  • Renovations to your current home as part of a mortgage refinance that includes your existing mortgage and construction costs

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What projects are not eligible for a construction loan?

If your new home construction is being financed by the developer or builder, then you'll purchase your home from them and will not need a construction loan. You will follow the same process for buying your next home or buying your first home.

TD Bank does not currently offer construction financing for condominiums of Co-Operative apartments, or construction loans through FHA or VA. TD also offers commercial real estate construction loans.

What does a TD construction loan include?

Construction loans at TD Bank are structured to meet your specific needs, and a loan officer can help you understand your best options when you discuss your loan qualifications and mortgage application. Your local mortgage loan officer can also answer your questions about how construction loans are structured.

  • With a TD Bank construction to permanent loan you can expect:

    • Fixed or adjustable rate options
      TD Bank offers fixed rate and adjustable rate construction to permanent mortgage options within the states we serve for primary residences of 1-4 units and for second or vacation homes
    • Flexible down payment options
      Generally, any funds you contribute to the overall transaction can count towards your down payment, including land purchase, architectural drawings and permits
    • An initial loan payment
      If you already hold a loan on the property where you're building, the first disbursement of the construction loan will pay off that loan before construction starts
    • Interest-only payments during construction phase
      During the construction phase, you'll make interest-only payments on the outstanding balance of the construction loan. Your interest only monthly payment amounts will be determined by your draw schedule and how much it costs to construct the home. This interest only period will continue until the construction period ends
    • Conversion to a fixed-rate mortgage after the construction phase
      Once the home is complete and a certificate of occupancy is provided, the loan converts to the permanent mortgage and you begin to repay both principal and interest
  • What are the benefits of a construction to permanent loan?

    This type of construction loan involves only one application and one closing that covers both the construction phase and the permanent financing. This means you can:

    • Save money on closing costs
      You'll have just one application and one closing, so you will only pay closing costs one time
    • Lock in your interest rate
      Your interest rate can be locked in at the start of construction when your loan closes. Interest rates will be based on individual qualification details, although in general they are in line with interest rates for the purchase of an existing home
    • Provide documentation only once
      With one application and closing you'll only have to provide your credit, income and assets documentation once

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What is a construction loan draw schedule and how do I use it?

Once approved, you will use your construction loan on a draw schedule. A construction loan draw schedule is a detailed payment plan for the home construction project and details how TD Bank will disburse funds as the project progresses. Once approved and ready to break ground, funds will be distributed based on the draw schedule agreed upon by you and the builder.

"Draws" are payable to the borrower and the builder and can only be used for the building of the home, including flooring, lighting and other permanent fixtures. Not permanent home décor, furniture and other furnishings cannot be financed in the construction loan.

An inspection to verify work completed will be done at each draw request and title updates will be completed multiple times during construction. You can talk to your Construction Loan Servicer for more information.

How do I know how much to borrow?

To help you figure out how much to borrow, you'll first want to talk with your builder to decide how much your new home construction will cost.

Like any mortgage, you want to ensure your monthly payments fit within your budget, and during construction, you may have added costs. Construction loans only cover the cost of land and construction, not living expenses while your house is being built.

Many people, for example, plan to use the proceeds from the sale of their current home to help finance the construction of their new home. This allows them to make a larger down payment and reduce the size of their loan.

But, keep in mind, if you've sold your home, you may need to factor in the cost of rent while your new home is being built. Renting during home construction will add to your living expenses, so budget accordingly to afford rent, construction costs and other living expenses.

How do I apply for a construction to permanent loan?

The approval process for getting a construction loan is similar to applying for an existing home purchase. We will review documentation for your loan provided by you, and we will also review the sales contract, plans and specifications, and other items to approve the builder.

When you're ready to get started, a TD Bank Mortgage Loan Officer can help guide you through the process.

What documents do I need to apply?

Apart from a few specific documents, the overall process for applying and securing a construction loan does not vary from state to state. To get qualified and apply you will need:

  1. Your basic debt, income and asset information

  2. A signed construction or purchase contract with your builder or developer. The contract will detail certain aspects that will impact your loan, such as: contract amount (including construction and cost of land), and the construction start and completion dates

  3. The builder will need to provide financial statements as well as current license and insurance documentation

  4. Borrowers in search of a builder's mortgage, meaning those who plan to self-build and/or act as their own general contractor, will need to demonstrate that they are an experienced, licensed, and insured builder

How much down payment do I need?

A construction to permanent mortgage requires 20% of the sales price as down payment or 20% equity in the transaction. Keep in mind:

  1. Sales price is calculated based on the cost of the land/lot plus the cost of construction

  2. If the property has been owned for more than 12 months, the fair market value may be used to calculate total purchase price

  3. The end or "as constructed value" of the home may be greater than the sales price calculated for down payment

  4. Any funds used towards construction such as architectural plans, building permits, cash used to purchase the lot, etc. may be included as part of the down payment – talk with a Mortgage Loan Officer for more details.

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