5 Common Construction Loan Myths That Might Be Draining Your Wallet

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. Falling for these myths may result in higher expenses, delayed projects, or missed opportunities. Let’s debunk the top five construction loan myths so you can approach your project with confidence.

Myth #1: Construction Loans Are Just Like Traditional Mortgages

Many people believe that construction loans work the same way as traditional home loans. While both types of loans help finance property, construction loans are more complex. Funds are disbursed in stages (called “draws”) as the project progresses, and the terms are often shorter, typically 12 to 18 months.

Why it could cost you: Assuming the loan works like a mortgage may lead to mismanaging your funds or misunderstanding the loan terms. Work closely with your lender to fully understand the process.

Myth #2: You Only Need a Loan for Materials

A common misconception is that construction loans only cover the cost of building materials. In reality, these loans are designed to cover a variety of expenses, including labor, permits, inspections, and even contingencies for unforeseen costs.

Why it could cost you: Not budgeting for these additional expenses can leave you scrambling for extra funds mid-project. Plan a comprehensive budget that includes all possible costs.

Myth #3: You Don’t Need a Down Payment for a Construction Loan

Some borrowers mistakenly believe that construction loans don’t require a down payment. While it’s true that requirements vary by lender, most construction loans do require a down payment—often 10% to 25% of the total loan amount.

Why it could cost you: Failing to prepare for a down payment can delay your project or cause you to miss out on favorable loan terms. Talk to your lender about their specific down payment requirements early in the process.

Myth #4: The Lowest Interest Rate Is Always the Best Choice

It’s tempting to choose a lender based solely on the lowest interest rate. However, low rates can sometimes come with hidden fees, less flexibility, or poor customer service during the construction process.

Why it could cost you: 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.

Myth #5: Construction Loans Cover Everything You Need

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.

Why it could cost you: Assuming your loan will cover every expense can result in financial shortfalls at the end of the project. Be sure to ask your lender what is and isn’t included, and budget accordingly.

How to Avoid Costly Mistakes

• Educate Yourself: Take the time to understand how construction loans work and the specific terms of your loan.
• Work With a Trusted Lender: Choose a lender who specializes in construction loans and can guide you through the process.
• Plan for the Unexpected: Include contingency funds in your budget to handle any surprises.
• Ask Questions: Don’t hesitate to ask your lender about fees, timelines, and what’s included in your loan.

Misconceptions about construction loans can lead to costly mistakes, but being informed can save you time, money, and stress. By understanding the truth behind these myths, you’ll be better equipped to manage your project and achieve your goals.