Have you been visualizing walking inside your beautiful house? Excited to design the porch and lawn? Imagining how it would look outside and how it would feel once you step inside the house? Where the living room would be, where the stairs should be or where you want your windows to be facing? Are you browsing on furniture catalogs and pumped with the idea of sitting on your favorite couch? Are you contemplating on the wall colors or how many rooms will there be? Are you resolved that it is the right time to build your dream home? Here are crucial things you need to consider when applying for a home construction loan in building your dream house.
What is a Home Construction Loan?
A home construction loan is a short-term mortgage used to pay for the expenses incurred in building a house or another real estate project. The contractor or home buyer applies for a loan from the bank or lending companies to cover the costs of the construction. The lenders usually release the loan in stages according to the construction blueprint. The banks and lenders consider this type of loan as high risk so they charge higher interest rates than the usual mortgage home loans. A Home Construction Loan has variable rates that fluctuate with the prime rate. It is a short-term loan contract with a maximum of one year.
How to Qualify For A Home Construction Loan?
Since this type of loan has a higher risk than the traditional house mortgage, it can be challenging to get approval from the lenders. In the traditional mortgage, your house serves as collateral and the banks or lenders will seize your home property when you default on your mortgage payments. With a home construction loan, the lenders don’t have that option so they consider this type of loan as high risk. To ease up lenders’ fears and concerns, you will likely need to have these qualities:
- Good or Excellent Credit Score
- Stable Income
- Low Debt to Income Ratio
- 20% Down Payment
- Recent Bank Statements
In order to qualify for the home construction loan, the lender will require you to submit the construction timetable, planned house, and lot size, plans and blueprints, a comprehensive list of construction details, what contractors will be working on the home, materials to be used and a practical and realistic budget. Working with a reputable general contractor can help you gather this needed information and can assist you to navigate through the application process.
Where to Find A Suitable Bank or Lender?
Not all banks and financial institutions offer home construction loans because of the level of risk involved. Local Credit unions or Regional Banks tend to be accustomed to the housing market in their area. They are generally more adept in approving home constructions loan applications to borrowers in their town or community. It is wise to get pre-approved for the home construction loan before collaborating with a supplier to save you some unnecessary expense later on. You just want to stick within the pre-approved budget and not go beyond your capacity. The banks or lenders will usually pay the funds directly to the contractor rather than the borrower. Other purposes of a construction loan are to fund restoration projects and to build new homes.
Approval and Start of Construction
Once you get the approval of your loan application, you will be put on a bank draft or draw schedule that follows the project’s stages of construction. You will usually be expected to pay only the interest of the loans during the construction. Every time funds are requested, the lender sends someone to inspect the project’s progress.
After Construction Process
When the construction is complete, you can refinance the home construction loan into a permanent mortgage. You can also apply for a new loan to pay off the home construction loan, sometimes referred to as the “end loan”. Lenders will usually require the borrowers to pay off the entire loan balance by the time the project is complete.
Achieving Your Dream Home Goals
Achieving the home design you have always dreamed of can be challenging. Applying for a home loan is more difficult but not impossible. Expect to have other expenses than the intended costs of the house. It is important that you have healthy savings to cushion the impact of unintended expenses. You will go through a rigid application process because the lenders want assurance that you will be able to pay off the loan in time.
If you are not yet qualified for a home construction loan at the moment, channel all your efforts in improving your credit standing and building your savings for your dream home a few years down the road.