New Home Loan Vs Existing Home Loan
Do you know that new home construction loans are different from the ones that are used to buy existing homes?
As a home buyer, it is important that you understand what a new home construction loan is all about.

Mortgages granted to buy already built homes use the built home as collateral for the payment of the loan. In case you default on mortgage payments, the bank takes ownership of the home and sells it to compensate for the unpaid mortgage.

What is New Home Construction Loan?
As the home is there to serve as the collateral, a mortgage can easily be arranged for buying an already built home.

But in the case of home that is yet to be built, the bank has to grant a loan for the construction of the new home based only on the value indicated in your application form. But Is the signature of a Tom, Dick or Harry is enough for the lender to grant mortgage?

Understandably, the financing process for new home construction loan is very stringent. Once the lender agrees to grant you a new home construction loan, a draw schedule is outlined. A draw schedule is one document in which the lender describes in detail how the loan will be disbursed.

The usual practice is that a new home construction loan is disbursed in 25% increments. To get the next 25% of the loan amount, you have to establish that 25% of the construction work has been completed. For this the lender requires an appraisal report on the progress of the construction.

In a new home construction scenario you need not make any payments to the lender until the first part of disbursement has been made. The good news is that it is enough that you make payments for only the disbursed portion of the loan. As construction work progresses, more portions of the loan will be disbursed and the monthly payment that you need to make will gradually increase.

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As your home is completely built, the full new home construction loan will be waiting for you to be paid. But there is a way out to pay this well in advance. Here is how.

Before your new home construction loan is approved, the lender will require you be first approved for a mortgage. This requires a commitment letter from your mortgage lender. Once the home is built, the mortgage amount can be used to repay the balance of new home construction loan.

One-time Close Vs Two-time Close
Your new home construction loan can be either one-time or two-time based on the time at which the interest rate is locked in. With one-time closing, both new home construction loan and the mortgage close simultaneously. With two-time closing, new home construction loan closes first and the mortgage gets closed only when the home is fully built.