Basics, Requirements and Process for Construction Loans, Part 2 | Wasatch Peaks

Published in Wasatch Peaks Credit Union, Home Tips, Mortgage Loans

Image of decorated home that transitions to drawn design imageIn part one of this two-part blog series, we went over some of the basics and qualification requirements for construction loans. Commonly used by those building a new home or making major renovations on a current one, construction loans help bridge the gap between these areas and traditional mortgages.

At Wasatch Peaks Credit Union, we’re proud to offer a variety of loan types, from mortgages and car loans to business loans and several others. In today’s part two, we’ll go over the format for loan disbursement, builder draws and the way you pay back a construction loan once you’re approved for it.

Loan Fund Disbursement

In most construction loan situations, building will generally begin right away once the loan is approved and secured. It’s important to note, however, that this does not mean all of the construction loan funds are immediately dispersed at this point.

Rather, the lender will disperse funds in a series of “draws” as construction moves further and further down the road. This will begin with laying the foundation and beginning with home framing, and will proceed from there. Our next section will dig a bit further into builder draws and how they work.

Builder Draws

Each time your builder requests a draw of funds from the construction loan, the lender in question will set up a basic inspection from a third party that will confirm the progress on the project. Before funds are released, they have to confirm that things are going to plan.

Before this, confirm that all subcontractors and suppliers have been paid by the builder, plus collect signed releases of any liens against the property. If the builder does not pay subcontractors, the legal recourse will be placed on you, at which time you’d have to sue the builder – this is why it’s important to work with a trustworthy, reputable builder.

Wherever possible, you as a borrower should participate in the inspection and draw process. After all, you are the one with the final design in mind, and you should be present to check on progress.

When the final draw is released to the builder, it becomes your responsibility to pay the construction loan off in full or convert it to a standard mortgage.

Borrower Payments

Generally speaking, payments begin immediately after the loan closes for most construction loans. During the construction period, only interest is typically paid by the borrower – interest will only be charged on the draws that have already been dispersed to the builder, not on the full amount.

However, know that you’re allowed to make larger or additional payments during the construction period. As long as you verify that your lender does not charge a prepayment penalty, this can be a great way to lower your eventual total interest paid.

For more on construction loans or any of our other loans or services, speak to the staff at Wasatch Peaks Credit Union today.