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Are you looking to purchase a second property but aren’t sure whether to build your own or renovate an existing one? In either case, a construction loan may be your best option.

Construction loans are ideal for homeowners looking to build new, expand, renovate, or make energy-efficient upgrades on a second home or vacation property.

We’ll review how you can use a construction loan for this type of project, what the construction loan process looks like, and how to get started on your journey to a new property or vacation home.


Using a construction loan for a second home or vacation property

How you use your construction loan is entirely up to you.

Are you ready for a vacation home for the family? Maybe you’d like to purchase a second home to renovate and rent out. A construction loan is a great way to do all this.

So, what type of projects do construction loans apply to?

If you’re interested in building a new vacation home, or second home, you can cover the costs of purchasing land, construction, permits, materials, and any other construction-related expenses with a construction loan.

If you plan on renovating or expanding a current property, a construction loan can pay for the renovations, additions, or upgrades like an attached garage or kitchen remodel.

You can use these loans to fund significant infrastructure projects, like building a swimming pool or landscaping, or any significant project that would increase the property’s value.

You can make energy-efficient enhancements to your current property, such as adding solar panels, energy-efficient appliances, or insulation to your home. You’ll not only add value to your property but save money on utilities as well.

Lastly, you can use a construction loan to fund updates or improvements to a property you plan to rent out. You can use the funds for updating amenities and living spaces to make the property more appealing to renters.


What does the construction loan process look like?

With a construction loan, you can fund the purchase and renovation of a second home, vacation property, or a new rental.

The process to get a construction loan can vary depending on what you’re planning to do, the type of loan you use, and your lender.

Typically the construction loan process works as follows:

  • Define your goals, and organize your construction plans
  • Meet with a lender and obtain pre-approval
  • Official loan application and underwriting
  • Approval and disbursement
  • Construction
  • Inspections and approvals
  • Merge of construction to permanent loan
  • Closing

It’s essential to understand the timeline between when the building begins to when you close on your construction loan and what this will mean for you.


Construction loan timeline

Construction can begin once you receive loan approval. The funds from your loan are disbursed to pay for any costs needed.

Once construction is complete, the property must pass inspections to ensure the project passes all marks and fulfills any requirements for the loan.

If there are no issues, your construction loan will convert to your permanent mortgage for the property, and you can close on the loan.

Rather than taking out multiple loans to cover all needed costs, construction loans provide the funding under one mortgage, meaning you’ll only have to apply and close once.

These “one loan covers all” types of loans are called construction-permanent loans.

FHA 203(k) loans are also a type of construction loan used to cover the costs of purchasing a home and making renovations. The buyer will pay back the loan monthly for both costs.


Requirements for a construction loan

The requirements for a construction loan can vary depending on your lender, loan, and specific project details. However, there are some standard requirements you can expect.

Your lender will review your credit history and current mortgage to determine if you’re a reliable borrower. While a higher credit score may provide better rates, a lower range doesn’t automatically disqualify applicants.

The lender and underwriter will also review your debt-to-income ratio to ensure you meet the requirements and can afford the second loan.

A down payment may be required to secure the construction loan and the type of construction loan you choose will affect how much you may have to pay.

For example, the VA construction loan typically does not require a down payment for eligible borrowers.

You’ll also need to provide detailed plans, blueprints, timelines, and a budget outlining all costs for the project. You may need contracts with licensed professionals for larger, more complex projects.

Legal and zoning requirements for your property are another factor to consider.

With any construction loan, you’ll need to have an inspection and approvals, so you’ll want to ensure your second property complies with local zoning regulations and building codes.


How to get started with a construction loan for your next property

Give yourself the upper hand as you expand your homeownership investments.

Research which lenders are reputable and offer the loan you’re looking for. Prepare a list of questions regarding their terms, interest rates, additional fees, and track record. As this is a significant investment, you’ll want to ensure you’re working with someone you trust to help you achieve your financial goals.

Obtaining a pre-approval for the construction loan is a great starting point. Pre-approvals provide an estimated amount of how much you’re eligible for. This can help when deciding on a budget and hunting for properties.

When you create a budget, consider:

  • Material costs
  • Labor costs
  • Unexpected construction costs
  • Permits
  • Additional fees

This will help your decision-making when conceptualizing your project and choosing your construction loan.

Unless you work in construction professionally, consult with contractors in your area to gather intel on your desired project. This will help reduce any possible risks or issues during your build.


Start building your vacation property or second home with The Federal Savings Bank

Can’t find the ideal property to meet your needs? Let’s build it!

A construction loan from The Federal Savings Bank can help you achieve your dreams whether you’re looking to renovate an investment property or build your family the vacation home of your dreams.

At The Federal Savings Bank, we pride ourselves on providing a variety of loans to solve our clients’ needs. We’re veteran-owned and proud to serve our fellow community members every step of the way.

Connect with us today to learn more about construction loan offerings from The Federal Savings Bank.


Subject to credit approval. Terms and conditions may apply. Subject to VA eligibility requirements. Property insurance is required on all loans secured by property.

This information is intended for educational purposes only. Products and interest rates subject to change without notice. Loan products are subject to credit approval and include terms and conditions, fees and other costs. Terms and conditions may apply. Property insurance is required on all loans secured by property. VA loan products are subject to VA eligibility requirements. Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to you individual situation.