How Constructions Loans Build Your Dream Home

How Constructions Loans Build Your Dream Home
  • Opening Intro -

    Finding the perfect home may be exciting and difficult.

    There are so many styles to choose from —colonial, mid-century modern, ranch, mid-century contemporary, and townhouse, to mention a few.

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After deciding on a style, other important considerations include the home’s size and location. With so many factors to consider and so few houses available, finding your dream house within your budget can be difficult.

If your dream house isn’t available, or it doesn’t exist, you can always create one. This allows you to construct the perfect house without the stress of buying a pre-owned home. To fund this project, you’ll need to understand construction loans.

What Is A Construction Loan?

Construction loans obviously are financing solutions for building or renovating a home or other property. These loans are usually short-term, with a maximum repayment period of a year. Unless you follow bank reconciliation methods to enhance your status, these rates are greater than mortgage loan rates.

A construction timeline is required to secure a construction loan. Prepare to divulge your budget and property plans in detail. If you meet these criteria, you can start looking for a construction loan.

What Does It Cover?

Each project is different, but generally, a construction loan covers the following:

  • Land
  • Labor and materials
  • Plans, fees and permits
  • Interest reserves
  • Contingency reserves
  • Closing costs

Who Does Construction Loans?

You may ask who are the top construction loan lenders. A few national construction mortgage lenders are US Bank, Wells Fargo, and First National Bank.

While these are well-known institutions, you may be better off with a local lender. You may find a great local credit union that offers home construction loans.

Credit unions can occasionally be more flexible than national lenders.

When receiving a new house loan, constantly ask around to area builders and real estate brokers. You may find a better offer than the big banks.

How Does A New House Construction Loan Work?

Unlike a standard mortgage, a loan to build a house has no collateral backing it up. This makes lenders anxious, so you have to go through more hoops before they give you money. Expect a thorough review of your architectural plans, builder, and financing.

Construction loans are also disbursed differently than typical loans. Lenders pay builders in installments, or ‘draws,’ rather than one large cash. Each drawing corresponds to a key project phase, such as foundation pouring, framing, and finishing.

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Also, the lender will do a home appraisal to determine the market worth before approving your construction loan request. A mortgage lender wants to ensure they are lending the correct amount, just like any other mortgage.

Types Of Construction Loans

Construction loans come in a variety of forms, primarily, they include construction-to-permanent and construction-only. Here is the difference between the two.

  • Construction To Permanent

    After the construction phase, the loan converts to a normal mortgage. The benefit is, homeowners will pay for only one set of closing charges. This option is best for those that want to save on closing fees and lock in mortgage funding.

  • Construction-Only

    A construction-only loan covers the house building cost only.  After construction, homeowners need to pay back the loan in full, usually within a year. This is best for those who have some cash on hand or plan to pay off the loan by selling their old property.

Rates On Construction Loan

Construction loan interest rates, like other loan rates, change based on the borrower’s loan size, creditworthiness, and term. Moreover, construction loan interest rates are usually variable, meaning they change based on an index, such the prime rate.

Rates are typically one percentage point higher than regular mortgage rates.

How to Choose the Right Construction Loan Lender

Loan approval standards, inspection procedures, and draw timelines vary amongst lenders. Consider which of these guidelines you and the contractor would like.

Realistic budget projections from lenders can help both you and the contractor. Ask different lenders how they may assist you. Check about a lender’s reliability by asking these questions:

  • What building financing do you provide?
  • What are the interest rates? How do they vary?
  • How are construction draws paid?
  • Is it possible for the builder to request a first draw to cover material costs?
  • What are the fees?
  • Can I utilize my land’s equity as a down payment?

Finally, trust is key. If you have a long-standing partnership with a bank, you may choose their loan even if the rates are higher. The relationship you already have can be used to your advantage to get a better offer.

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Ultimately, your choice of lender will be based on your project and financial situation. There is no infallible approach to find the best lender, but covering all bases and paying close attention to the future agreement can help you complete your building project successfully and without stress.

Conclusion

You now have a better grasp of a new house construction loan. Building a house requires more planning than a standard mortgage. Hopefully, the advice on obtaining construction loan funding was useful.

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