Here’s your guide to the construction loan process at Merchants Bank. Whether you’re building your home from scratch or renovating an existing home, our local Mortgage Lenders can walk you through our construction loan options.

We’re with you from start to finish.


Learn more about our construction loans and the process by clicking on a link below:

Vacant Lot Loan*

A vacant lot loan is ideal for someone who wants to secure a building site in advance of new home construction. 

10% Down Program – Up to 40-acre lot size acceptable and larger parcels allowable with larger downpayments.

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Home Construction Loan Options*

Our construction loans are flexible to fit your situation, whether you’re buying a lot and building, building on land you already own, or remodeling a home.

  • New Home Construction - Construction to permanent financing
  • Purchase an Existing Home - Renovation options
  • Lot Loans for Your Home Construction - Available up to 90% loan-to-value financing
  • Remodel Your Current Home - Use your equity for a new roof or other home improvement projects

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From Start to Finish: How Construction to Permanent Financing Works

  1. Application: Choose your local lender and apply now. After reviewing your application, you will be notified if you’ve been pre-approved for both a construction loan and permanent loan. For qualified applicants, a minimum down payment of 5% is required if the purchase price is under $548,250 (certain programs may allow for a minimum down payment as low as 3%). With a 5% down payment, you will have a single permanent loan with mortgage insurance at 95%.

  2. The Appraisal: Once plans and specifications are received from the builder, an appraisal is ordered. After the appraisal is received, your loan package is submitted for approval.

  3. Construction Loan Approval & Draws: Upon approval, you can close on the construction loan. If applicable, your lot will be paid off with the first draw, title transferred to your name, and closing costs paid.

    The builder typically takes draws (payments) throughout the construction phase. During this phase, you will only be charged monthly interest payments on the amount of the loan advanced. At completion, the loan may be modified into a permanent loan. Escrows will also be set up for your property taxes and homeowners insurance.

  4. Lock Your Permanent Loan Rate: Once the home is near completion, you have the ability to lock the interest rate on the permanent loan. Merchants Bank offers 15-, 30-, 45-, 60-, and 75-day lock options.

  5. Converting to Permanent Loan: When the home is complete the appraiser performs a final inspection and that, along with updated income and asset documentation, is submitted to underwriting for approval on the construction loan modification to make the loan permanent. If approved, you close on your home and move in. Construction to permanent loan modification allows for reduced fees on permanent financing with local servicing.


Construction Loan Terms & Frequently Asked Questions

Click on a questions or section below to learn about common construction terms and see answer to frequently asked questions.

Not sure what your banker or contractor may be talking about? Review these common construction loan terms to help you better understand the process and documentation.

Annual Percentage Rate (APR) – A yearly rate of interest that includes fees and costs paid to acquire the loan. 

Change Order – If you want to change something in your home, fill out a change order to document that with your contractor and submit it to your attorney. 

Cost Overruns – Additional expenses not anticipated prior to construction or added costs as a result of changes. 

HELOC (Home Equity Line of Credit) – A line of credit secured by a second mortgage on your home that may be available to a homeowner based on the percentage of equity they have in their home. Learn more about Merchants Bank HELOC options.

Inspections – As you draw funds from your construction loan, we verify the work is being done along with verifying material. 

Interest-Only Monthly Payment - Billed interest only each month based on the outstanding balance of your construction loan, during the construction phase.

Loan Estimate (LE) – A written estimate of expected closing costs a lender must provide a prospective mortgage customer within three days of homeowner submitting a mortgage loan application. 

Mechanics Liens – Someone does work on your home and you do not pay them or do not pay them in full. They can put a lien on your home. This is very important. You NEVER pay anyone with cash. This is why we use an attorney. 

Modifying Your Loan – A modification is when you are completely done. Then your construction loan gets modified to permanent financing. Two loans, ONE set of fees. 

Points vs. Buy Down vs. Origination Fee – A discount point equals one percent of a mortgage loan and is used to reduce the interest rate. Buy downs are fees to reduce the interest rate. Some lenders charge “an origination fee” as a bank fee to originate the loan.

Rate and Term Refinance vs. Cash-Out Refinance – A rate and term refinance is a refinance for the purpose of lowering the interest rate or term on your current first mortgage. A cash-out refinance is a refinance used to pay off the existing mortgage and to take extra cash out of your home’s equity for other purposes. 

Right of Recession – The period of time following the “closing” of a mortgage or refinance on your primary residence where the customer has the right to change their mind about the transaction. 

Servicing Your Loan – The entity that collects the loan payments and manages the loan’s escrow accounts is the “loan servicer.” Merchants Bank customers benefit because we retain the servicing rights for the vast majority of mortgage loans originated through our offices. Learn more about local servicing.

Sweat Equity – Labor work that you, the homeowner, complete on your own to take advantage of lowering your overall costs. Examples of sweat equity: Painting, site cleaning, staining, and if experience permits, hardwood flooring, ceramic tile. If you are a licensed contractor take advantage of your skills. 

Sworn Construction Statement – The sworn Construction Statement is a complete detail of the anticipated costs to build a residential property and is signed by the contractor and owners. 

Turn Key New Construction/Spec Home – You find an uncompleted home and want to buy it. You can talk to the builder the pick out colors, carpet and such. This is treated as a purchase.

You will have a construction rate during the construction phase. This will change when the loan is permanently financed at the conclusion of the construction phase.
We are here to help. We have a complete Construction Kit we would be happy to provide upon request that details the construction loan process. Please ask your local Mortgage Lender for a copy.

Our local Mortgage Lenders are here to help. Contact us today – we’re happy to answer your questions and educate you our on construction loan options.

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* Subject to approval