Many people dream about one day constructing their own home. It may be time to start thinking about a construction loan if you want someday to come soon. On the other hand, construction loans are distinct from traditional mortgage loans, and it's critical to grasp the differences. Here's a brief overview.
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If you're thinking about buying a house for the first time, you could be considering a mortgage loan. A mortgage is a loan secured by an existing structure. However, if you want to build your ideal home, you'll need to qualify for a construction loan. Land, permits and fees, designs, labor and supplies, and closing costs are typically covered by construction loans. Construction loans are not available from all construction lenders, so you'll have to look for one that does.
The majority of construction loans are for a specified sum. During the construction process, specific amounts of the funds are delivered to the builder upon completion of particular elements of the house. Borrowers usually are only responsible for interest payments on the construction loan during the construction phase. When the house is finished, most construction loans are converted to mortgages. Your mortgage payment will include principal, interest, and property taxes once construction is completed and you convert to a mortgage.
Lenders consider them to be slightly riskier. As a result, construction loans have higher interest rates and shorter periods than other loans. Why? The lender has the house as collateral if you default on your mortgage payments. However, if you default on a construction loan, the lender is left with a partially completed house.
Construction loans involve a more significant number of persons. A mortgage loan is a contract between you and your lender. You'll have a third party involved with a construction loan: your contractor. Both your ability to pay and the contractor's ability to finish the task on schedule and successfully will be scrutinized by the construction lenders,
Building loans are frequently subject to deadlines. Many of them demand that construction be completed within 12 or 18 months and that a certificate of occupancy be obtained once it is completed.
Because there is more for the lender to consider than for a mortgage loan, the approval procedure for a construction loan might be lengthy.
Just as with a mortgage, you'll have to show evidence of income (your salary), bank statements, work history, planned down payment, and your credit score and credit history to lenders. Because new construction is prone to delays and cost overruns, you may also need to show confirmation of additional cash reserves. Prepare to offer your house's plans, specifications, and drawings as well. All aspects of the house, including the outside grounds, are eligible for a construction loan.
Your contractor or builder will have to submit a budget based on the designs, specs, and drawings. Financial information from the builder, such as profit and loss or cash flow accounts, length of time in company, licensure, and other documentation, may be required by lenders.
Construction lenders will look over your application to see if you can show that you can pay both the construction loan and the mortgage. They'll look over the blueprints and the contractor's details to ensure that the house's budget is fair and that the contractor has experience building houses.
Getting pre-approved for construction financing before getting too far along in the planning process is a good idea. You don't want to spend money on plans, specifications, and drawings if you're not going to get the financing.
When you apply for a construction loan, think about the same things you think about when you make other housing decisions: