Getting a construction loan seems to be the perfect solution for people faced with financial constraints while trying to build their homes. This type of loan gives them access to the funds they need to build your home from scratch. Lending services like Express Capital provide different types of construction loans to help people build their dream homes.
Meanwhile, below we will be discussing the various types of construction loans that are available and how to get one. But first, let’s talk about construction loans and what they are all about.
Construction Loans: What You Need To Know
A construction loan is a short-term loan that provides funding for real estate projects. It usually comes with a high-interest rate which is to be paid off upon the completion of the project.
Due to the short time frame of construction loans, their availability depends on how long it takes to complete the project. To be considered by lending companies, you will need to provide a detailed construction plan, a realistic budget, and a construction timeframe.
If your application gets approved, a draw schedule would be laid out for you where the lender would disburse the funds in installments to cover each stage of the building process. The draw schedule is often in sync with the completion of major milestones such as laying the foundation, framing work, roofing work, etc.
Costs Covered By a Construction Loan
A construction loan can be used to cover the cost of contractor labor, land, building materials, etc. Items such as home furnishings are not included in the cost of construction loans. But permanent fixtures such as appliances and landscaping may be included in the cost of construction loans.
Some lenders may include a contingency reserve in their loans to cover the unplanned cost that may come up during construction. This can serve as a cushion to the borrowers if they should decide to make an upgrade to the plan after the construction has already begun.
Types Of Construction Loans
This type of loan involves you borrowing money for your home construction project. After the completion of the project, the loan is converted into a traditional mortgage. The benefit of this loan type is that you get to pay once for the closing costs without additional settlement fees. Usually, when a construction loan is converted to a permanent loan, it becomes a long-term loan taking between 15 to 30 years to pay off.
With this type of construction loan, you are required to pay the closing costs or any other associated fee when you get the loan. After the construction has been completed, you may need to reapply for another loan to offset the cost of the construction loan. This would mean you would go through a second process of paying for closing costs which would cost you more money.
Other types of construction loans include Owner-builder construction loans and renovation loans.
Requirements For Getting a Construction Loan
The basic requirements for a construction loan are a good credit score, a low debt-to-income ratio, and your ability to prove that you have a sufficient source of income through which you would repay the loan. Depending on the lending service company you choose and the amount you want to borrow, you may also need to make an upfront payment.
Other requirements may include having a well-detailed plan. This would build confidence in the lenders and boost their chances of approving the loan, especially if the plan was drafted by the construction company you would be working with.
Providing an appraisal with an estimated worth of the finished building will also be helpful, as the building will be used as collateral. The lending company would want to ensure that the collateral is not of a lesser value than the loan.
How to Get a Construction Loan
Find a Certified Construction Company
Before approving a loan, the lending company would want to be assured that the construction company handling the project has the expertise and experience required for the project. If you don’t have access to any construction company, you can ask for referrals from your friends who have completed their building projects. You can also look through the National Association of Home Builders (NAHB’s) directory to find local contractors within your area. Before settling for any contractor, it’s best to compare their price and expertise against other competent contractors.
Prepare Your Paperwork
It’s likely for the lender to ask for a document that shows the contract between you and the building contractor. The contract should include detailed plans and the pricing for the project. So, ensure that you have the necessary documents and references for the contractor before starting your application.
Choose a Construction Loan Type
Before you apply for a loan, you should have critically assessed the benefits and drawbacks of each loan type to determine which one is most suitable for you.
Lastly, in getting a construction loan, ensure that you meet all the requirements stated by the lending service you wish to work with.