Construction Loans
Finding the perfect house can be a fun yet challenging endeavor. With so many factors to consider while house hunting – including house style, size and location, just to name a few – sometimes people don’t know where to even start.
Oftentimes, buyers find that some houses meet most of their needs, some meet a few and some meet none, but rarely does one meet them all. This creates the need to compromise and move some of your “must-haves” to “nice-to-haves,” but not deal-breakers.
Don’t feel like giving an inch on your wants and needs? Fear not, because if your perfect home isn’t available (or doesn’t even exist), you can build a new one that will check all your boxes. However, to finance this build, you’ll need to know about construction loans.
What Is A Construction Loan?
A construction loan is a short-term loan that covers only the costs of custom home building. This is different from a mortgage, and it’s considered specialty financing. Once the home is built, the prospective occupant must apply for a mortgage to pay for the completed home. While we don’t finance construction loans, we can help you when it comes time to convert this to a permanent mortgage.
Construction Loans Vs. Traditional Mortgages
There are several key differences between a construction loan and a traditional mortgage. As mentioned, construction loans are short-term loans, usually no longer than a year in length. On the other hand, traditional mortgages are long-term loans, with terms typically ranging from 15 – 30 years. With a mortgage, the borrower receives the money in one lump sum. Upon closing on the loan, the payments start immediately and consist of both principal and interest.
When you take out a construction loan, you’ll usually make interest-only payments while the construction is being completed. Construction loans also tend to have higher interest rates than most home loans because they are considered to be more risky for lenders.
Special Considerations for Construction Loans
Most lenders require a 20% minimum down payment on a construction loan, and some require as much as 25%. Borrowers may face difficulty securing a construction loan, particularly if they have a limited credit history. There may be a shortage of collateral because the home is not yet built posing a challenge in seeking approval from a lender. To gain approval for a construction loan, the borrower will need to give the lender a comprehensive list of construction details (also known as a “blue book”). The borrower will also have to prove that a qualified builder is involved in the project.
