Buying a house in today’s world is a good investment, but building your own home is more than that. Building your own home is the chance to create something completely unique. It’s a chance to infuse your home with your distinct personality and ideas and create a space that is truly yours.
If you’re thinking about building your own home, you’ll need a way to finance the construction of your new home. Although construction loans and housing loans share similar traits, construction loans are designed specifically for people looking to build a home.
In this article, we’ll go over how to get a home construction loan and some of the benefits they offer.
How to Get a Home Construction Loan: Types of Loans
To understand the benefits of a construction loan, you have to know the different types of construction loans. There are three different types of construction loans: construction-to-permanent loans, construction-only loans, and renovation construction loans.
Construction-To-Permanent Loans
Also known as one-step or single-close loans, these types of loans transfer over to a mortgage as soon as the project is complete. With construction-to-permanent loans, the person financing the construction only pays the interest on the loan during construction.
Once the project is complete, they begin making payments on the loan in the form of a mortgage.
Construction-Only Loans
Also known as standalone loans, these loans only cover the cost of construction. Typically these loan term lasts for a year because that is how long construction usually takes.
Once the project is over, the person financing the construction has to pay the loan in full.
Renovation Construction Loans
These types of loans are for people who are buying a “fixer-upper” and need a loan on top of their mortgage to renovate the home. The loans are usually wrapped up into a mortgage.
This means that homebuyers pay off the loan by making their mortgage payments, which covers the mortgage and their renovation construction loan.
Starting the Construction Loan Process
When it comes to starting the construction loan process you’ll need two things: a builder to build your home, and a financial institution to loan you the money.
The good news is that if you have a certain builder or financial institution you want to work with, you can start with either. Reliable builders will have financial institutions they have worked with in the past who will approve their plans.
Your financial institution will also be able to supply you with a list of reliable builders who they have confidence in and have worked with before.
Qualifying for A Construction Loan
When you apply for a construction loan, your loan application will be sent to a loan underwriter.
The loan underwriter will look at your income, debts, assets, and credit history to determine whether you’ll qualify for the loan. They will offer you loan terms based on that information, offering different interest rates and payment structures.
Make sure that you have a good payment history, a good credit score, and plenty of savings before applying. This will give you the best chance of getting a loan and getting favorable loan terms.
When you apply for the construction loan, you’ll need to submit a number of documents that prove your income, tax history, marital status, and other information.
Some of the documents you’ll need include:
- Recent tax returns
- Valid driver’s license, photo ID, or passport
- Pay stubs
- Proof of assets such as a deed to a house or other property
- Bank statements
- List of debts
- Proof of other income such as investment accounts
You’ll also need to come up with a down payment. Since construction loans are considered to be higher risk, most financial institutions will require a downpayment of 20% of the value of the home.
And finally, your lender will need to approve the plans of the builder. If your lender has worked with your builder before, there’s a greater chance they will approve the loan since they have confidence in that builder. If you are using a reliable builder for your home, there should be no issue with getting the plans approved.
Why You Should Get a Construction Loan
Getting a construction loan might seem like a big process, they can offer great benefits by the end of your project.
Saves Money
The main advantage of construction loans is that they help save you money in the long-term.
For construction-to-permanent loans, many people might think they cost more money based on their higher interest. But construction-to-permanent loans can actually be less expensive than typical loans. Whenever you receive a loan like a mortgage, you are usually required to pay closing costs.
With construction-to-permanent loans, the loan is already approved and transitions into your mortgage. This means you don’t have to pay any of the closing costs or other fees associated with securing a mortgage.
And if you get a construction-only loan, it allows you to secure a new loan once the construction is over. This means you can find a loan with the best terms possible, rather than being stuck in a loan that doesn’t have the best terms.
More Efficient, Less Stressful
Construction loans are also great because they make the process of building a home more efficient and less stressful.
When you secure a construction-to-permanent loan, it means you don’t have to spend more time shopping around for loans or worrying about the terms of a new loan. Because they allow you to roll the loan into your mortgage, you can start enjoying your home immediately.
And with renovation construction loans, you won’t have to worry about making a payment on a separate loan every month. You just make your loan payment when you pay for your mortgage, which makes things less stressful and more efficient.
Get a Construction Loan for Your Dream Home
Now that you know more about how to get a home construction loan, you can start the process of getting your own construction loan and building your dream home.
If you have any more questions about construction loans or how to get one, please visit our blog.