Construction Loans in Texas

Building a house instead of buying one allows you to make a design that best suits your needs. But if you're planning to take a loan to finance the project, you won't be using a home loan. It'll be a construction loan instead. Here’s what you need to know before applying for construction loans in Texas.

What Are Construction Loans?

As the name suggests, construction loans are loans used to finance the construction of a new house or other type of building. After completing the project, the borrower takes on a mortgage to pay the lender back. 

While it can vary per project, the loan typically covers the following:

• The property itself (if you don’t own it yet)
• Final plans, construction permits, and fees
• Building materials and labor

The loan can also cover contingencies in case you need to spend more than anticipated. 

Government loan programs such as VA, USDA, and FHA home loans also let you finance the construction with an approved lender. 

How Does a Construction Loan Work? 

Construction loans often carry more risks to lenders than regular home loans. There’s the chance that the construction might cost more than the projected amount due to design changes or mistakes. Also, since the house isn’t built yet, they can’t use it as collateral for the mortgage if something falls through.

To reduce the risk of default, the lender will thoroughly review your finances, employment history, and credit score. They’ll also require the house design plans, construction schedule, and estimated project cost to determine the loan amount. You might also need to make a down payment of around 20 percent, though this requirement could be reduced or even removed if you take a government-approved loan. 

Unlike in regular loans where you’re given the total loan amount, a lender gives you the construction loan in installments or “draws.” Since a house’s construction is done in phases, the draws are only released after each phase is done. The payment schedule can be determined after sorting the project timeline out. But you, the contractor, and the lender may still have to negotiate further on an agreeable timetable. 

An example of a draw payment plan would be like this: 

• Draw 1 - Building plans, permits, and foundation work
• Draw 2 - Framing
• Draw 3 - Walls, rough-in, doors, windows, and roofing
• Draw 4 - Electricals, plumbing, carpentry
• Draw 5 - Finishes such as painting, flooring, and connecting fixtures
• Draw 6 - Occupancy permit and final inspection

The lender will usually monitor the construction project’s progress to see if they’re right on schedule for the next draw. 

How Do You Choose the Right Construction Loan? 

Construction loans generally come in three types, each with its own purpose and benefits. Let’s take a look at how each kind can benefit you.

1. Construction-Only Loan

Construction-only loans are short-term loans that only provide the money needed to construct the house. Once the project is finished, you’ll pay the principal and the closing costs. This type can suit you if you have plenty of money on hand to repay the lender. 

However, if you don’t have the cash, you’ll have to apply for a mortgage to pay the lender back. This would mean another set of closing costs at the end of your term.  

2. Construction-to-Permanent Loan

Like a construction-only loan, this type also finances the construction project’s costs. The difference is that it automatically becomes a mortgage after the project completion. During the construction period, borrowers only need to pay the interest to the lender. The combined principal and interest payments only begin once it’s converted to a mortgage. 

You might find construction-to-permanent loans more suitable if you don’t want to go through the process of applying for another loan. You’ll also only have to pay for one set of closing fees.  You may also find the monthly payments more manageable for your budget than if you had to pay the lender back in full.  

3. Renovation Loan

This kind can be used by borrowers who want to do major remodeling or renovation projects right after buying a house. Here, the principal consists of the renovation project’s estimated cost and the house’s sale price. You can opt for this loan if you plan to buy a fixer-upper but lack the funds to fix it up. 

Why Apply for Construction Loans in Texas?

Building a house from scratch can be just as expensive as buying one that’s already made. Taking a loan can help you finance the project and ensure that it’s completed without a hitch. If, for instance, you used your own cash to build the house and ran out of it during construction, you would likely have to put the project on hold. Furthermore, you might still have to pay contractors for work they’ve already done. 

With a construction loan, you won’t have to spend all your money at once. You’ll have some buffer time to, say, make some investments or sell your old house to pay the lender back. 

If you’re planning to apply for construction loans in Texas, we’re here to help. The Empower Group has financed prospective home buyers and builders for over 20 years. Our service-oriented team will work with you to ensure a seamless turn time so you can get your home project started quickly. You can get started with our online application process here.