Construction Loans
In this guide, we will discuss construction loans. We will cover the various types of construction loans available. Want to know more about Construction Loans to build your dream home or renovate your investment property? Have you pictured your dream home in your mind, but you can’t find it on the market? Do you want to customize your home according to your preferences and needs? Do you own a vacant lot and want to transform it into your ideal living space?
There are different types of construction loans. Construction Loans for primary homes have different requirements and guidelines versus construction loans for investment properties. Construction loans for investment and commercial properties are not regulated, therefore, easier to qualify and close.
You may be interested in a construction loan if you answered yes to these questions. A construction loan is a loan that allows you to finance the cost of building a house from scratch. It can help you turn your dream home into a reality. But what exactly is a construction loan, and how does it work? What are its benefits and drawbacks? And how can you apply for one and manage it effectively? In this blog post, we will discuss thoroughly what construction loans are, how they can help you, the process, requirements, and the pros and cons of getting one.
What Are Construction Loans?
When building a house, you can use a construction loan to cover the expenses for a short period. Unlike regular home loans, construction loans are not based on the completed property’s value but on the project’s estimated value. Construction loans are also disbursed in stages, or drawdowns, as the construction progresses. Lisa Christian-North, the project manager for R247 Properties, a commercial real estate developer and property management company, shares the following about using construction loans:
Construction loans can be a great option to build your home from scratch and customize it according to your preferences and needs. You can choose your design, materials, fixtures, and finishes. Save money by avoiding the markup builders charge for their services.
Construction loans are expensive in terms of fees, points, and rates. You must know that construction loans have challenges and risks. Construction loans require a higher down payment than traditional home loans, ranging from 10% to 20% of the loan balance.
Interest Rates of Construction Loans
Construction loans have higher interest rates and fees than regular home loans, as they are considered riskier by lenders. Construction loans are usually interest-only during the construction period. Interest-only loans mean you only pay the interest on the amount you have drawn. Ronda Butts, a dually licensed realtor and loan officer and CEO of One Solution Real Estate shares the following information about the interest rate of construction loans:
Construction loans are interest only short term loans. Most construction loans are one year interest only balloon mortgages. Unless the construction loan is a one time construction to permanent loan, the loan needs to be refinanced out of the construction interest only loan to a permanent loan.
The principal amount should be fully paid at the end of the construction period, from six months to two years and depending on the project. You can choose between two alternatives when the construction loan period is over either pay the whole amount at once or switch to a regular home loan with a lower interest rate and a longer term. Most borrowers prefer the second alternative because it lets them repay their loans over time.
Types of Construction Loans
Different construction loan types are available depending on your project and preferences. There are different types of renovation loans, such as the FHA 203(k) loan, the Fannie Mae HomeStyle loan, and the VA renovation loan. In the following paragraphs, we will cover the different types of construction loans.
What Are Construction-To-Permanent Loans
Construction-to-permanent loan: This loan combines the features of a short-term construction loan with a long-term mortgage. The loan pays for the construction of your home and then changes to a regular mortgage when the building is done. You only need to pay closing costs, and you can secure your interest rate at the start of the project.
What is a Construction-Only Loan
Construction-only loan: This loan only covers building your home. The loan has to be paid back completely when the construction is finished, from half a year to two years, depending on the project. You may have to pay closing costs twice and face higher interest rates if you refinance the loan into a permanent mortgage later.
What is a Renovation Construction Loan
Renovation Construction loans allows you to buy or refinance an existing home and include the cost of repairs or improvements in one loan. This loan clan finance major renovations or remodeling projects that add value to your home.
Owner-Builder Construction Loans
Owner-Builder Construction Loans allow you to act as your general contractor or builder for your project. Use the loan to finance the cost of materials, labor, and permits for your home. However, this type of loan is harder to qualify for and usually requires a higher down payment, a higher credit score, and more documentation than other types of construction loan programs.
What are the Requirements To Be Eligible For a Construction Loan?
To apply for a construction loan, you must provide some documents and information to your lender, such as a copy of your land title and contract of sale—a comprehensive outline and estimate of your building project.
Hard Money Construction Loans are for investment and commercial properties only. Hard money loans are very easy to qualify for and close in less than one week. You can close hard money construction loans in one day.
A copy of your building contract and permits. A copy of your income and credit history. A valuation report from an accredited appraiser Your lender will then evaluate your qualification and ability to settle the loan based on your income, assets, debts, credit score, and project viability. Your lender will also visit and appraise your property before approving your loan.
Who Benefits From Gettng a Construction Loan
Getting a construction loan has advantages and disadvantages before deciding whether it is right. In the following paragraphs, we will cover the benefits as well as the negatives of using a construction loan for your home or investment properties.
You can create your ideal home from the ground up and personalize it to suit your tastes and requirements. Using construction can cut costs by skipping the extra fee builders add for their services.
You must pay a higher down payment than traditional home loans. You must pay higher interest rates and fees than regular home loans. You must deal with more paperwork and documentation than with regular home loans. It would be best to manage multiple parties involved in your project, such as builders, inspectors, appraisers, and lenders. You need to cope with potential delays or problems during your construction.
What Are The Drawbacks of Construction Mortgage Loans
A construction loan is a great option for building your dream home from scratch. However, getting a construction loan also has some challenges and risks you must know. At Lending Network, LLC, we can get you qualified and approved for a construction loan by providing valuable service and guidance. We will assist you throughout the process:
- Finding a reputable builder
- Applying for a loan
- Negotiating terms and rates
- Monitoring progress
- Requesting drawdowns
- Communicating with lenders
- Preparing for conversion or payoff
- If you intend to apply for a construction loan or learn more about it, please contact us today.
You can choose from various lenders who offer competitive terms and rates for construction loans. You can change your loan to a regular home loan when the building is finished. No matter how much capital or equity you have, it is often wise to use construction loans for the renovation for your home or business. Lending Network, LLC is the premier five-star lender for construction loans.
