The 2 Types of Construction Loans Explained

If you and your family are ready to construct the home of your dreams, then with the help of building loans, you can make that dream a reality. Also called a self-build mortgage, lenders will give homeowners the funds to cover the cost of land, materials, and the contractor who’ll be working on your new abode. Unlike home loans, construction loans are a bit complicated, and the money you receive is in disbursements, rather than one lump sum.

New construction loans are much harder to qualify for most borrowers. Lenders want every single detail of how you are going to use the money that they give you. They’re also looking for a stellar credit score to take you seriously.

If you think that getting a construction loan is right for you, then we are going to talk about how they work and the types that are available to homeowners.

How Do Building Loans Work?

Since most banks consider new construction to be risky investments because the borrower cannot use a home that doesn’t exist as collateral, because of the high-risk, payments on a loan for building a new house is more costly.

Borrowers will pay an initial down payment of 20 or 25 percent on the cost of construction. But there are some banks, which will allow an initial amount of 10 percent down. What is more complicated is that the homeowner does not get a lump sum payment for the new house, but it’s dispersed at different stages of the construction.

Lenders will also need an inspector to check on the construction site, to make sure that everything is right on schedule with your newly built home. The inspectors are hand chosen by the bank that gave you the loan.

While the contractors build your home, your lender only charges the interest-rate, which will vary during the construction phase. After your home is complete, banks will give the option of converting the unpaid amount of your construction loan into a traditional home loan, or you can pay it off in full.

Types of Construction Loans

If you want to get a loan for the construction of your new home, there are two main options to choose from, which we’ll list below.

Construction-To-Permanent Loans

You will choose this loan if you want to pay for the construction of your house. Once the builder has completed your new home, then it will turn into a traditional home mortgage. It’s two loans rolled into one. It’s popular with new homeowners because they pay lower fees.

Once your new construction loan turns into a traditional home loan, then they give you either 15 or 30 years to pay it off. Most lenders will allow borrowers to get a locked maximum mortgage rate. To qualify, they apply for a construction-to-permanent loan before the contractors begin building. But, you will be required to make a 20 percent down payment of the expected mortgage.

Stand-Alone Construction Loans

If you want an option with lower down payments, then a stand-alone construction loan might be the answer for you. If you already own a house and don’t have a ton of money to put down, you will have a significant advantage by qualifying for a stand-alone loan.  Another benefit of getting this type of loan is that you can live in your current home while they build your new one.

When there are advantages, you will have disadvantages too, and there are a few of them that come with getting a stand-alone loan for building a house.

The Disadvantages of Getting a Stand-Alone Construction Loan

You are paying twice the amount for fees and closing costs that include- your construction loan and the mortgage.

You won’t qualify for a maximum rate, so if your interest rates rise while your home is under construction, then you will pay those rates on your permanent loan.

How to Qualify

Applying and qualifying for building loans is very difficult to achieve. If you are applying for a new construction loan for your home, the bank knows that you will not have collateral so you might have a harder time qualifying. Lenders also look at your credit score and your ability to make monthly payments while your home is under construction.

But, if your bank does not think that you’re able to make those monthly payments during and after they build your home, then the lender can deny your application.

You should also have cash set aside to cover any unexpected costs that your lender may not include in your loan. Sometimes the costs of building a home can run over the original amount that you have already borrowed. So it’s always good to keep this in mind and have extra savings, to be on the safe side.

Apply for Your Construction Loan Today

There are all types of loans when you’re looking at getting a new home, and building loans are not any different. If you are looking at building your dream home, then remember that there are more than one types of new home construction loans that can fit your needs.

At the Construction Loan Center, we can help you navigate the ins and outs of construction loans. We can help you find one that not only fits your budget but tweaks it to your individual needs. Learn more about how we can help you fulfill your dreams of having a custom built house by visiting us today.

For useful tips to help you save money and build your credit score, visit the experts at Stapler Confessions. They have articles, ebooks, and toolkits that will help readers keep their credit scores on the up and up. Visit them to learn more about you can become more credit savvy today.

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