Choosing to build your home instead of buying one is the only way to get precisely what you want in your home. You can select the land, the layout, and all the different finishes used. You will build that home to custom-fit your and your family’s life. However, making your home from the ground up can be a little challenging. For instance, you will most probably need construction financing.
Unlike a usual home loan, building a new home requires much more money to cover labor, materials, and other upfront costs. That is where a construction loan comes into play. If you plan to build your new home, you must know everything about construction financing.
What Is Construction Financing?
A construction loan is a short-term loan that can help finance all the upfront costs of building a property from the ground up. After your construction is finalized, you typically use a mortgage to pay it off. In the case of a home construction loan, you will need a hefty down payment (in most cases, at least 20%) and should also expect higher interest rates than traditional mortgages. It is primarily because these loans are considered much riskier for the lender to fund since they don’t require you to put down collateral.
For instance, a mortgage loan will be secured by real estate, but any asset does not secure a construction loan. This will make it much harder for real estate lenders to recover losses if you default on your payments.
Types of Constructing Financing And How Do They Work
You can find several different kinds of real estate construction financing, including:
- Home Renovation Loans: These loans are made to help individuals purchase and update a house in one swoop.
- Construction-Only Loans: They help you cover the cost of building your real estate property. However, you must pay it off after the construction finishes – generally within one year.
- Construction-To-Permanent Loans: This kind of construction financing starts as a short-term loan and later converts into a long-term real estate mortgage after construction.
- Owner Builder Loans: These allow you to be your own builder and finance the ground-up construction of your property. If you have some experience as a contractor, it is an ideal option for you.
- End Loans: It is a long-term mortgage that you will need to apply for after your construction is done.
A construction loan will come with an adjustable or fixed interest rate and function like a credit card. These loans come with a line of credit, and you can tap into those funds as you need during your home’s construction. The best thing about this approach is that you only have to pay the interest on whatever amount you have borrowed. For instance, if you take $10,000 from a home construction loan this month, that is all you will pay the interest on.
You don’t have to pay any interest on the rest of your credit line until you have withdrawn those funds. As for retrieving the funds, a real estate lender will release your funds using a draw schedule. It’s a disbursement strategy set by your builder. It will be paid either to you or your contractor/builder directly. However, most lenders will need an inspection to confirm all the work done before disbursing the money.
What Can A Construction Loan Pay For?
You can easily use your construction financing to pay for your home’s construction needs. These generally include:
- Permits
- Materials
- Labor
- The land where you plan on building
- Services performed by planners and architects
- Closing costs
If you already have a home, you can still have access to construction financing if you want some funding to pay for the renovations. However, these updates offer several other financing options, like cash-out refinances, a home equity loan, or a home equity line of credit.
How to Qualify For Construction Financing
Real estate lenders are generally strict about who they give a construction loan to since it comes with many risks. They may ask for a professional evaluation of your construction plan, check out your builder or contractor of choice, and ensure you are in a sound financial situation. You should have a decent credit score and be ready to pay a lump sum down if you wish to qualify. Some general qualifications that you must meet to get approved for construction financing include the following:
- A credit score of 650 or above
- Minimum down payment of 20%
- DTI ratio of 45% or less
You will need a signed sales contract with a real estate builder when applying for construction financing. The builder must also provide some documents, including their insurance and license copies.
Have Queries Related To Construction Financing? Contact Real Estate Funding Solutions For Help!
Our Real Estate Funding Solutions team can help you understand how you can access construction financing. We can also ensure you get the best terms for your upcoming home construction project. With our help and expert guidance, you can quickly build the home of your dreams without any setbacks. Call us at 855-913-8637 for more information.