If you’ve decided to build your dream house or workspace rather than buying an already existing one, you may be surprised to know that you won’t be receiving a conventional mortgage. Instead, you’re more likely to opt for a construction loan.
What is a Construction Loan?
For the uninformed, construction loans are used for building or renovating your home or any other building. These loans have a relatively higher interest rate and exist for a short span of time. Primarily, construction loans are based upon the hypothetically projected value of the home once the project is completed.
How is Construction Loan Different from Conventional Loans?
Construction loan programs are significantly distinctive from real estate mortgages. The criteria of lending construction loans are changed from time to time in order to meet the current currency portfolio.
How to Get a Construction Loan?
The safest step to get a construction loan is to get the services of a commercial mortgage broker. Trying to find the market value at any given time can be a very tricky task. Utilising a mortgage broker’s expertise and established relationships with a bank and private mortgage lenders can turn out as value to money.
How Construction Loans Work?
The traditional loans are paid out by usda mortgage companies to cover the total amount of the house in a lump sum amount. Whereas construction loans are paid out in instalments. The bank or the lending company will pay instalments to the builder during various phases of the building process. These instalments are often referred to as “draws”.
Each draw covers the cost of a certain phase of the building, which means that the cash flow has to be enough to cover these costs upfront. Before any draw is made, the bank will perform an inspection to determine and verify the estimated cost of the building’s current phase. Furthermore, they would also analyse how well the builder is executing the projected timeline.
As you must have realised by now, financing of a construction loan is so variable, it makes it very crucial to work with a good builder. You need someone who is experienced with budgeting and scheduling and who also possess the ability to work professionally within these limitations. You need to ensure your research before applying for a construction loan, so the chances of ending up with someone reputable increases.
How is a Construction Loan Advantageous?
Returning a construction loan has its advantages, as the loan is not paid out as a complete hefty amount, the bank or lender company does not ask you to return it until the construction is completed. During the construction, you only have to pay interest payments on the loan, which gives you some extra time to save. The terms and guidelines of construction loans are very flexible as compared to other conventional loans. To a certain extent, you will be allowed to work your loan terms around the needs of your project. Moreover, the added scrutiny ensures that the project is on budget and on a time schedule.
Construction loans have their charm, but we should not oversee the risks they come with. They have a very high qualifying standard regarding credit and down payment. Typically, a credit score of at least 680 and a down payment of at least 20% is required for qualifying as a potential candidate. In addition to that, short term loans are always perilous. You are expected to pay the full amount by the end of the loan term. If you’re going down this route, make sure that you can return the loan even if your original finances fall off.
In all, if you’re taking a construction loan for the first time, it’s better to contact a private mortgage lender as it buys some more time to go through the bank financing process.