Common Misunderstandings of Construction Loans

Construction loans can be an excellent tool for turning your dream home or business project into reality. However, misconceptions about these specialized loans can lead to costly mistakes. 

Being informed about construction loans can save you time, money and stress. By understanding the process and loan, you’ll be better equipped to manage your project and achieve your goals.

Here are some common misunderstandings about construction loans:

1. They Require a Huge Down Payment
   Many people assume construction loans demand a significantly higher down payment than traditional mortgages. While a larger down payment is often required, options with lower down payments may still be available depending on the lender and borrower qualifications. Most construction loans do require a down payment—often 10% to 25% of the total loan amount.
2. You Can Borrow the Full Project Cost
   Borrowers may believe they can finance 100% of their construction costs, but most lenders require borrowers to cover part of the expenses to minimize risk.
3. They Are Only for Contractors
   Some think construction loans are exclusively for licensed contractors or developers. In reality, owner-builders or individuals managing their own projects can also qualify, though it may require more documentation.
4. You Can’t Get a Construction Loan with Bad Credit
   While excellent credit improves your chances, some lenders provide options for those with less-than-perfect credit, often with stricter terms or higher interest rates.
5. You Only Need Financing for Construction
   Many overlook the transition to permanent financing once construction is complete. A construction-to-permanent loan can simplify this process, but not all borrowers are aware of this option.

While construction loans are designed to cover most costs, they don’t always account for all project-related expenses. For example, they may not cover landscaping, furniture, or certain upgrades.

1. The Process Is Too Complicated
   While construction loans involve more steps and monitoring than standard mortgages, many lenders offer resources and guidance to streamline the process for borrowers.
2. Construction Loans Are Only for New Builds
   People often think these loans are exclusively for building homes from scratch, but they can also be used for major renovations or additions to existing properties.
3. Interest Rates Are Always High
   While construction loans may have slightly higher rates than traditional mortgages, competitive rates can still be secured with a strong financial profile.
4. Choosing the wrong lender could lead to higher overall costs, especially if the loan comes with excessive fees or doesn’t accommodate your project timeline. Look for a lender with transparent terms and excellent service, even if their rate isn’t the lowest.

Let Core Bank walk you through understanding how construction building loans work. Contact someone from our mortgage team today!

Lender Costs (i.e., Administration, applications, closing commitment, processing, underwriting and wire fees) will be waived when borrower closes on permanent refinance. All other 3rd party fees will apply to the permanent refinanced loan. Loans are subject to credit and property approval. Additional terms and conditions may apply. Loan programs are subject to change without notice.