If you are thinking of making a large purchase like a new home, then Construction Loans are quite the catch. The benefits to this loan can be huge, especially to fans of customisation.
Construction Loans Made EasyGetting a mortgage for a new construction home is different from borrowing money to purchase an already existing one. Here is a few points and tips you should know about considering this loan.
What is A Construction Loan?
This loan can help provide funds that are needed to build a residential property like a new home. It is good for a year plan if the property is expected to be built in the timeframe. After the time, you will be asked to show a certificate of occupancy to make sure the construction is complete and you are living in the new residence.
Cost of Construction Loan
A construction loan has higher interest rate than the traditional mortgage loan. Though, this is usually just for a temporary amount of time, and you are to only make payments on the interest.
The lender keeps check on their investment which is the new house in construction by sending an inspector. This inspector will check on various stages of the construction which will be about 6 times. When the inspector returns the data of the construction to the lender, then they will issue out payment of the loan to the contractors. Then you will only make interest-only payments to the lender for the installment of money until the construction is complete.
What Does Construction Loan Cover?
Below is a list of the terms this loan covers:
- Building materials
- Contractor labor costs
- Permit required to complete the project
- Cost of the land the new property (house) is being built on
Types Of Construction Loans
There are two most common types of this loan, they include:
This type of loan lets you borrow money to pay for the cost od building the home. After you have moved into the new home, the loan is converted to a permanent mortgage. The benefit is that you will only have to pay closing costs once hereby reducing the overall fees.
This provides the money needed to complete the construction of the home. Note that you are responsible for paying the loan in full after the completion of the home. Or for getting a mortgage to pay off the rest over-time.
Requirements For Construction Loan
Before you can get approved for a construction loan, you are required to:
- Have a good credit score
- Proof that you can repay the loan issued
- Have a low debt-to-income ratio
- Get ready a down payment of the loan which is about 3% of the home total cost
- Detailed plan of the repayment after the construction is complete. This plan may be provided by the builder to the lender.
Apply For Construction Loan – How To Get A Construction Loan?
This process is usually different from getting a conventional loan or other type of mortgage. The process is broken down to four simple steps which include:
Search For A Licensed Builder
Do research online and ask for recommendations when comparing a builder for the construction. Check if they are in good standards with your state’s construction contractor’s board.
Gather The Required Documents
You will be required to get a contract plan from the builder. This plan should include the pricings and plans for the new construction of the home you want to purchase or construct.
Find A Lender
Next, check for a lender with good costs and terms that suits your repayment plan. Ensure to select one with good morals and understanding to avoid delays and repayment issues later on.
Apply And Get Pre-approved
Check if you are pre-approved for the construction loan so you will know the amount you can borrow for the project.
What Type Of Loan Is Best For Building A House?
A construction loan can be used during the building process. It is repaid after the construction is completed. The borrower will have their regular mortgage to pay off, and this is known as end loan. Note that not all lenders offer the construction-to-permanent loan, which offers a single loan closing.
Is Construction Loan Different From Mortgage?
Construction loans are a short-term loan which is usually not more than a year. They are interest only payments depending on the advanced amount on your loan. While mortgages are long term loan and the money is released to borrowers in a lump sum. Repayment consists of both the principal and interest.
What Credit Score Do You Need For A VA Construction Loan?
Once you have gotten a lender that offers VA construction loans, you should meet the VA guidelines and minimum mortgage requirements. Though, there is no VA-set minimum, but some lenders require a score of 620 or higher.