Here’s a guide to what you need to know about construction loans
It is a rewarding experience to build your own home. You can design everything right from the beginning. However, there are other benefits to building your own home. You can save a lot of money instead of selling your property to a realtor. You could save as much as 20% on the average price for a home in your area. Even if your goal is to sell the property within a few years, it could still be a good deal. Let’s look at one option you have to finance your home’s construction. Here are the construction loans facts:
What is a construction loan?
A construction loan is a loan for those who want to build or fix up a home. This loan allows you to borrow money for something that doesn’t yet exist.
A construction loan is available to anyone who wants to build a new home. This loan can help you to save money if you’re not sure how much your home will cost.
What is the Work of it?
It is very easy to get a construction loan. A lender or bank will give you a commitment for a construction loan. This will confirm that you are eligible for a construction loan, and the amount you can borrow.
Once you have a commitment for a construction loan, you can approach a homebuilder. The bank will inform you how much you are allowed to borrow. Once you have an idea of how much you can borrow you can meet with a builder to discuss your plans for building your new home.
How to apply for a construction loan
Check your credit score
Most banks will request a copy your credit report before granting you a loan for construction. To verify the accuracy of your credit report, you must inspect it. You should immediately dispute any errors in your credit report with the credit bureau.
Request a Pre-Approval from a Bank
Bad credit can make it difficult to apply for a loan. If you have good credit, however, you should be able get a loan for construction. Make sure to get a pre-approval letter before you look at other homes. This will show the builder you are serious about building your house.
Find a loan officer
Finding a banker to help you is the last thing you want to do before you start. You will need to find someone with a lot of experience in building homes as a first home builder. It can make the process much easier if you find a loan officer who has experience in construction loans.
The bottom line
To get a outstanding construction loan, you must be prepared before you start. Every first-time builder should get pre-approved by the bank. This shows that you are serious about building. This will make it easier to get approval.
This is happening because “housing inventory remains at record lows,” Andrina Valdes (chief operating officer of Cornerstone Home Lending Inc.), says. More homebuyers are choosing to build homes when there isn’t a lot of housing available.
A loan for home construction can be used to cover the costs of the land and the house. There are two options. You can either get a loan to cover construction, and then apply for a mortgage, or you can take out a loan only to pay construction.
What are the Different Types Of Home Construction Loans?
Buyers can choose between a single-close construction-to-permanent loan or a two-close, stand-alone construction loan.
The main distinction: A one-time-close loan construction loan allows for you to secure both short term construction and long-term financing together,” Valdes states. “A two-time close construction loan requires approval of two separate loans and two closings.”
Construction-to-permanent, or C2P, loan: It funds the land and the construction, and then the loan converts into a permanent mortgage once the construction is complete. Because the borrowers pay only interest during construction, this loan is more costly than traditional mortgages. The loan can be converted to a standard mortgage and the payments may then be recast according to the remaining loan term.
C2P loans have one advantage: the borrower does not need to do underwriting or close. This can help save you time and money. Another benefit of this loan is during construction.
“If you lose your job or have a medical collection appear on your credit, it would not affect your permanent loan as it is already closed,” Melinda Williams, former mortgage loan officer and founder of HomebuyersHelp.info, says.
She also says that you’ll lock in a rate for the permanent loan to “protect against interest rate fluctuations during construction.”
A stand-alone construction loan is a loan that can be used to build a home. The lender will disburse funds to the builder according to the amount of work done. Borrowers pay interest on any withdrawals. The borrower must pay off the loan or get a new mortgage once it matures. This is usually within one year.
Valdes states that the type of mortgage you can convert your loan to depends on your financial and eligibility. She explains that to qualify for a VA construction loan one-time, you must be on active duty, a veteran, or a spouse who is surviving.
A stand-alone loan for construction can cost more than a C2P loan, if you need a permanent mortgage. This is because there will be two loan transactions and two closing costs. You could also pay a higher interest for the permanent loan.
What are the qualifications for construction loans?
The following requirements will apply to a loan for home construction:
Strong credit score Conventional loans may require a credit score of 700, although some lenders may have more flexible requirements. For loans through the Federal Housing Administration or Department of Veterans Affairs, credit score requirements might be lower.
A large down payment. The loan type will determine the amount of your down payment. A conventional mortgage may allow you to pay 5% down, while a construction loan will require at least 20% upfront. Ask your lender for information on how to obtain a construction loan without money down. FHA loans require a 3.5% down payment. USDA and VA loans may not require a down payment.
A licensed and reputable builder. The lender will verify that the builder can pay the suppliers and complete the project. Your builder will need to provide professional licenses, proof insurance, and references from vendors detailing payment history. The lender will also examine the builder’s credit rating, financial standing, and other information.
Borrowers who are looking for a construction loan rather than a traditional mortgage generally have to pay a higher interest rate. This is because there is no collateral, meaning that the home has not been built yet.