Building in Portland or Vancouver? Here’s Your Guide to Home Construction Loans

Homes in the PNW take many forms—from starter houses and rustic cabins all the way up to Craftsman houses and Queen Annes. This allows people in the area to settle down in a diverse range of dream locations. 

Whether you’re building in the suburbs, on a Washington mountainside or the outskirts of a fishing town near Portland, one thing will remain the same: You’ll need to figure out how to finance your build. That’s where home construction loans enter the scene. Home construction loans provide the financial support needed to turn your vision into reality, ensuring you can cover the costs of materials, labor, and land from the ground up.

What is a home construction loan?

Home construction loans are financial products that help people who want to build a home get the unique funds they need to make that happen.

These loans usually: 

• Are short term.
• Offer interest-only payments during the construction phase.
• Release funds in “installments” as you reach various construction milestones.
• Convert to permanent mortgages after completion. 

Because of their purpose, home construction loans are set up a little differently from a traditional mortgage, which results in a few differences in the experience if you’re the one taking on this type of financing. 

How do home construction loans work, and what will my experience be like?

When you start the process of applying for and managing a home construction loan, you’ll need to be prepared—there are several steps involved, and it can be stressful.

Take a deep breath. Picture your dream home in your mind’s eye. And then tackle these tasks in order: 

1. Get preapproved for your home construction loan. Getting preapproved can help you get a clear idea of your financial health and how much you’ll be able to borrow. This will ensure that you’re dreaming up a home design and location within your budget. 
2. Find suitable land and a qualified builder. Finding the right plot of land and a builder who shares your vision is critical. Doing your homework now will help you lay a sturdy foundation for your project—both literally and otherwise. Here, you’ll determine the feasibility and future success of your build.
3. Apply for your loan. Once you've selected your land and builder, it’s time to officially apply for your home construction loan. This step will require pulling together detailed project plans and budgets for your lender and working with them to make sure all of your paperwork is in order. 
4. Manage the disbursement of your home construction funds. If you get approved for your home construction loan, your lender will help you plan and manage the disbursement of your loan to keep your project on schedule and within budget. 
5. Comply with any relevant oversight and inspection requirements. Throughout the entire construction process, yout lender will help you out by working closely with area inspectors and your contractors to confirm that your home meets all local and relevant PNW codes and standards. This step is important for making sure your build is safe and legal.
6. Document, document, document. Keeping detailed records covering every angle and aspect of your build will help you manage fund disbursement and demonstrate adherence to both your plans and local mandates. If any disputes concerning your build arise, you’ll be happy you have records to reference.  

Once your home is built (congratulations!), your lender will help you transition your loan to a conventional mortgage. 

What are the various types of home construction loans available?

The range of loan products you can select from is nearly as varied as the types of homes you can choose to build. Your lender will help you select from the following options: 

Construction-to-Permanent Loans

If you’re working with an established residential new home builder, and you’re planning on building a very specific house plan on a predetermined lot, you may qualify for a construction-to-permanent loan. 

There are two types of construction-to-permanent loans: 

• A one-time close loan closes just once: before you break ground. You’ll establish loan terms and permanent financing at that time.
• A two-time close home construction loan closes initially before breaking ground, then closes again later when the terms for permanent financing are determined.

Owner-Builder Construction Loans

This specialty loan type—also known as DIY or self-build construction loans—can be helpful when borrowers plan to build a residential home and act as the general contractor during construction. Unless you are already a contractor yourself, getting approved for an owner-builder loan will require seeking out a specialized lender, since this is outside the scope of what many lenders, such as iQ, provide.

Renovation Construction Loans

Also available in one- and two-time close options, these loans are tailored to the needs of people who want to complete significant renovations to an existing home. These loans use the “after completed value” to help determine the terms. 

Ready to leverage the pros of home construction loans?

The right home construction loan can get you the customization and flexibility you need to build your dream or forever home. Interest-only payments during construction can also be very helpful for easing financial pressure during the construction phase.

If you’re a little apprehensive about the complexity of securing your ideal construction loans, we're here to work alongside you and your team to make sure every detail is in order. Contact the team at iQ to start your journey from blueprint to dream home as successfully as possible.