A lot of people dream of building their homes, but only a few have the up-front cash to undertake such an extensive project. Most people will need a loan to build a house and cover construction costs. These loans are referred to as construction loans. Suppose you are a homebuyer who wants to purchase an existing property. In that case, it is easy to get approval for a traditional mortgage if you have a reliable income and a decent credit score.
However, most lenders are more hesitant to lend money to borrowers who wish to construct a new house. Since they ask the lender to pay for something that is not yet built. To make matters worse, a construction project is always risky, and professional lenders don’t like to take risks with their money. With that said, you can secure a home construction loan. Today, our Real Estate Funding Solutions team will explain how these loans work and how to get the financing when you need to build a property.
Home Construction Loans: What Makes Them An Ideal Solution?
If you and your family are tired of visiting potential properties only to find flaws, consider building a house for yourself. This is where a home construction loan can help you out. A home construction loan is also known as a self-build loan, construction-to-permanent loan, or construction mortgage. It is a short-term loan used to help cover the cost of construction.
During your home’s construction phase, you will have access to funds gradually as your work progresses. Generally, you will only have to pay interest on your loan during this period. Most home construction loans come with a variable rate higher than traditional mortgage rates. It helps keep your monthly payments low but doesn’t help reduce your principal balance. Once your project is complete, you can either refinance your home construction loan into a permanent mortgage. You can also get an additional loan to help pay off your construction loan.
Eligibility Criteria and Documents
If you wish to get a home loan to build a house, you must meet all the eligibility criteria set out by the financial institution. It includes passing some general parameters like having a decent credit score, fulfilling annual or monthly income requirements, or meeting the minimum age requirement set by the lender.
General documents that you need to apply for these loans include income, identity, and proof of residence. You will also need an estimated quotation of construction cost. Along with proof of land ownership, approved blueprints, NOC from relevant authorities, and a construction plan. Moreover, if the real estate property is co-owned, there must be a co-applicant for the loan.
It is a complicated process to apply for a loan to build a house. It demands you to do some serious work to secure one. You must jump through several hoops to prove your construction project is viable, authentic, and relatively low risk for the lender. Most real estate lenders require you to pay at least a 20% down payment on their construction loan. These down payment requirements are high because home construction loans are generally considered riskier than traditional mortgage loans.
DIY Home Build Loans vs. Working with a Qualified Builder
To get approved for a loan to build a house, you must first show that you have a professional builder involved in the project. A qualified builder is a licensed general contractor who has successfully completed multiple projects. However, if you wish to build your home yourself. You must prove that you are experienced, licensed, and insured to undertake such an extensive project. Otherwise, your loan application might get rejected.
If you are determined to build your new home yourself, consider looking into owner-builder construction loans (also known as DIY home-build loans). It can be difficult for individuals to qualify for such loans in today’s housing market, but it’s not impossible. If you provide your lender with a well-researched and detailed construction plan demonstrating your home-building abilities and knowledge. You stand a higher chance of getting approved. However, when undertaking such projects, ensure you have an emergency fund to handle surprises.
Contact Real Estate Funding Solutions To Get Started On Your Loan Application Today!
While building your home from the ground up can be a highly rewarding process, landing the right real estate construction loan is not a walk in the park. If you wish to increase your chances of finding the right loan terms and getting approval. We suggest you contact our Real Estate Funding Solutions team as soon as possible. Our agents have helped several individuals acquire the funds needed to construct their homes. Moreover, we will also help you gather all the necessary documents before the application process begins to make the process even more effortless. Call our team today at 855-913-8637 to learn more about the process.