Construction mortgages provide financing solutions to assist homebuilders or renovators with building or renovating an existing property. Similar to traditional loans, construction mortgages require meeting certain eligibility requirements and providing a detailed project timeline.
Some lenders specialize in construction loans. You could also opt for a construction-to-permanent loan, which converts into a permanent mortgage once your construction period ends.
Getting a Construction Loan
When shopping for a construction loan, it is best to locate lenders with experience in providing this form of funding. An experienced lender should be able to explain its specific programs and procedures while it’s also wise to compare rates, terms, and down payment requirements before making your selection.
A lender should be able to explain its processes and the paperwork it will need from you, such as your builder contract, detailed plans of the project and an appraisal report. Aside from these requirements, having good credit score with low debt-to-income ratio as well as no significant recent financial activity are also crucial elements of approval for loans.
Stand-alone construction loans typically require more information from lenders than construction-to-permanent mortgage loans, since banks need to ensure that the finished building and land will have an appreciating appraised value. Furthermore, lenders will need to approve of both the builder and architect as well as review architectural plans and timeline estimates before proceeding with lending.
Qualifying for a Construction Loan
As with mortgage loans, construction loans must meet certain requirements in order to qualify. These include having at least a credit score of 620 and an acceptable debt-to-income ratio (house payments plus auto loan payments, student loans and any other revolving debt).
Start your search for lenders by visiting local credit unions or regional banks, as these institutions know more about your area’s housing market and may feel more at ease providing home construction loans.
Borrowers must present a comprehensive construction plan, complete with blueprints, specifications, work histories of contractors and proof of insurance. Lenders will most likely conduct an appraisal before releasing funds; during construction phase draws will typically be dispersed over a series of stages to ease cashflow issues.
Once construction projects are complete, most construction-to-permanent loans typically convert to traditional fixed or adjustable rate mortgages – creating two loan applications, closings and fees; but ultimately saving homeowners thousands in interest payments.
Shopping Around for a Lender
US Bank, Chase and Wells Fargo are three well-known lenders who provide construction loans. You could also search locally for banks or credit unions who specialize in this area of financing homebuilding projects.
An effective strategy when looking for construction loans is to shop around among different lenders to compare rates, terms and down payment requirements. Also be sure to inquire as to how quickly lenders approve and fund loans.
Most lenders require that you obtain builders risk insurance during the building process to safeguard their investment, so obtaining this coverage may even if using private lending sources.
Consider searching for a construction-to-permanent mortgage loan, which combines home construction with permanent financing in one loan package. This type of loan reduces fees as it only requires one round of qualification, paperwork and closing.
Getting Started on Your Construction Loan
No matter whether it is a standalone construction loan or construction-to-permanent mortgage loan, lenders require substantial down payments as well as evidence that your income can pay back the debt. Furthermore, you’ll likely require a signed contract between yourself and the builder as well as detailed plans/blueprints as well as a line item budget for the project.
Financial history, credit score and debt-to-income ratio will all be evaluated when considering construction loans; however, due to not having the security of a finished house as collateral for approval purposes may make approval more stringent than with conventional mortgage loans.
Once approved, once construction begins the lender disburses funds at key construction milestones as per an agreed schedule. You will then receive monthly statements showing all disbursed funds as well as any interest that has accrued; once construction is finished you typically convert your construction loan to a permanent mortgage and begin repaying both principal and interest in full.