If the concept of building a home from scratch is on your mind, it will indeed emerge as one of the smartest decisions to personalize your new space. Many people in the past have embraced this modality and never regretted it.
But at the same time just like buying a new house, construction can also be a bling prospect. You will need to ensure that you have sufficient funds to get such chores performed. And if you don’t have the requisite money, you still don’t have to worry!
Thankfully, home construction loans evolve as the savior that bestows the funds indispensable to procure land and pay for the materials and labor needed for building your new house. If you are thinking of reaping the perks of a new construction loan, it is for your information that there are different genera of construction loans to choose from.
Additionally, the approval process is quite convoluted in contrast to other types of traditional mortgages. This article unveils the deeper deets of construction loans in detail that you should imperatively know. So, stay tuned to get yourself enlightened about them!
But first, what is a Construction Loan?
As the name indicates, it is short-term financing that intends to cover the costs associated with building a house, right from the embarking on till the very end. What’s more, these loans may also include the costs involved in buying land, drafting plans, taking out permits, procuring materials and paying the labor for their services.
You are also privileged to make use of a construction loan to access contingency reserves or interest reserves. Delving a bit deeper; contingency reserves- just in case your project turned out to be more expensive than you initially anticipated. Interest reserves- for individuals who don’t wish to make interest payments during construction!
What is the functioning of Construction Loans?
Construction loans empower future homeowners to borrow money and pay for materials and labor costs. And as stated before, the money can also be effectively utilized to purchase the land that you will be building your coveted home on. If you are already a proud owner of the land, you are leveraged to use the property as collateral for your loan. Since the fundamental motive of construction loans is to cover the building process, they are generally given for a span of somewhere 12 to 18 months.
However, some loans automatically morph into a permanent mortgage as soon as construction is accomplished. For the user’s enlightenment; construction loans aren’t secured by a complete house. This is why; their approval process is a bit tedious in contrast to other kinds of traditional mortgages. Hence, your lender is going to follow the typical process of “scrutiny” that may include a series of other sub-processes. In simpler words, they will take every step to ensure that the loan is approved for the right person. In continuation; your lender is likely to inspect the complete architectural plans and will also look at your current financing situation. They may also ask you to give the estimated duration of construction and budget.
If you are able to persuade the lender by furnishing all the relevant details, there are no barriers to the approval of the construction loan. But it is imperative to highlight here that even after it is sanctioned, you won’t get the money as a lump sum. Instead, the lender will be making a series of installments directly to the builder as the various stages of construction are attained. This way; construction loans also emerge as a line of credit.
Installments are done after someone from the lender’s side physically visits the construction site to evaluate the status of construction before any payment is done. And as the money is drawn, you will have to pay the interest on the same amount and not the entire loan amount. Later on, when the complete construction errands are accomplished, you also have the option to convert this existing construction loan into a mortgage.
Construction Loan Rates
As with the case of other categories of loans, rates on construction loans typically depend on several factors including but not limited to the borrower’s creditworthiness, the size of the loan and also the loan term. Plus, the interest rates for construction loans are generally and never fixed. So, what does that exactly mean? It essentially means that they adjust over the period of the loan based on an index.
If we talk about the present rates, construction loans are up for grabs at loan rates between 5 to 6 per cent. Once again, the high rates are because construction loans are not secured by a completed home.
How to qualify for a Construction Loan?
Are the plans to gain the myriad perks of construction loans on your mind? If yes, you must fulfill the below-mentioned requirements:
• Excellent credit score
When we say an excellent credit score, a minimum of 680 is a must. But that doesn’t set the seal that you will still be able to qualify. Some lenders ask for a credit score of 720 also.
Hence, the imperative need of the hour before applying for a construction loan is that you must have a good credit score to avoid rejection of your application. Additionally, do check with your lender what credit score they expect?
• Sufficient income to pay off the loan
Apart from the credit score, you should also have sufficient income to pay the new construction loan and other debts. To ascertain this parameter, the lender may ask for several documents including your financial statements and other papers reflecting your annual income.
• A down payment of at least 20%
Borrowers are usually asked to make a down payment of 20% when taking a construction loan. However, this is certainly not the benchmark and others may ask you to pay a higher amount.
If you intend to know the deeper details of home construction loans, you may connect with our team of experts by visiting the site.