Construction loan

Would you like to build your own home, but your budget doesn't seem to cover it? Constructing a residential property can be expensive, and predicting the exact value is not always easy. That is where a construction loan comes in. This article covers everything you need to know about construction loans.

What is a construction loan?

A construction loan is a loan borrowed to finance the building of a home or a real estate property. A construction loan is a short-term high-interest loan, usually lasting for a year or less. During this period, the property must be completed and a certificate issued. A construction to permanent loan is rather permanent because the loan will cover acquiring land, construction, and mortgage.

How do construction loans work?

Construction loans can be acquired by anyone who qualifies for them after showing the construction plan and paying a down payment depending on the rate given by the lender. If you already own the land, the equity of the land can be used as a down payment to get your construction loan.

When a construction loan payment is not made within the specified time, usually one year, it can turn into a mortgage if you decide to convert your loan into a permanent mortgage. An alternative is acquiring an end loan to pay off your construction loan.

Construction loan repayment is made in monthly installments while the construction is still underway. The interest depends on the loan you borrow to complete a section of work. A construction loan can be used to pay for building materials and labor.

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How to get a construction loan?

Below are the requirements you need to get approved for a construction loan, so hereby is all the info you need in order to know construction loan requirements:

An approved building plan and budget- You have to develop the construction plan and the budget you expect to use for the construction work, including labor and building materials.
A down payment of at least 20%- This value can vary depending on the lender and the construction amount you are asking for.
Good to excellent credit score- Like any other loan requirement, you must attain a good, not perfect, credit score to be granted a construction loan.
Contractor's approval - Since a construction loan is purposefully for building works, the contractor must handle all the work so that the loan will be given to them directly, in most cases.
A good income to pay off the debt is a way to show the lender that you will be able to pay for the loan.

When you meet all these requirements, you will be approved for the loan, but in most cases, the loan is handed over to your contractor directly because they are responsible for the whole construction process.

How to get a construction loan with no money down?

Most lenders prefer to have your down payment of at least 20% before giving out the construction loan, but some lenders may be lenient enough not to expect the down payment. The good news is that if you own the land, you can use its equity as your down payment.

Construction loan rates

Since construction loans are short-term loans, they incur a relatively high interest compared to mortgage loans. This usually adds to at least 1% more than the normal mortgage rate.

Conclusion

It is a good idea to opt for construction loans, especially when you have a steady income and can repay the loan within one year. The construction loan interest rate might be slightly higher only because it is a short-term loan and needs proper planning before acquisition.