6 Things You Need To Know About Loans For Home Building
If you’re planning on renovating or building a new home, you want to keep stress and error to a minimum. Bickering with your neighbor over real estate boundary lines, as 17% of neighbor complaints are based on, should be your biggest worry, not money. If you’re starting to look at options for financing this reno or build, look no further than construction loans.
When you build your own home or add a room, you need a certain type of loan from the bank or lender. These loans are called construction loans. Often you only pay interest during the construction or building of your home. Once the construction is completed, the loan becomes a regular monthly mortgage or you will pay it in full. There are three types of construction loans: construction to permanent, construction only, and renovation construction loans. In this article, we will discuss what you need to know about these loans.
Construction to Permanent Loan
When you want to build your own home or completely renovate an older home, this might be the best loan for you. It works by giving you money for building and construction until the project is completed. After the loan converts to a regular mortgage that you pay monthly on the loan. The rates you get will be locked in when you complete the construction of your home. It is a good loan for those that have a plan and do not have the money to pay off the loan immediately.
You can convert the loan into a mortgage or get another loan to pay off the construction loan. If you have the money, you can pay off the loan completely. These loans pay for land, plans, fees, permits, labor, and materials, and closing costs,
Construction Only Loans and Renovation Loans
Construction loans must be paid off when your home or building is completed. Another option is that they give you the ability to shop around for the best mortgage. They are for consumers with large sums of available cash and the ability to pay off the loan or look for another one. These loans require multiple closing costs several times.
Renovation loans are a loan based on the value of the home after repairs and renovations are made. These loans are for those that want to renovate an older home that needs repair that they are buying. It is also for homeowners that want to refinance their homes and make major repairs. Usually, the customer does not have the money saved to make the repairs, so a loan is needed. Some renovation loans are FHA loans that give buyers money to buy a home and complete renovations.
New Construction Loans Have More Requirements
You will need construction plans and your finances will be reviewed when you apply for this type of loan. Your builder will be checked out too. The builder will be paid in installments instead of getting one lump sum. The payments will be given when phases of the construction are completed on the house or building. They will inspect the work before the payment is issued in most cases. Choose a builder that can finish the job on time and within your budget. The lender may request your builder’s work history, proof of insurance, blueprints, and contract for the project.
Home Renovation Loan Uses
A home renovation loan can be used to install a new furnace among other repairs. Did you know that most furnaces are designed to only last 15-20 years? A construction loan may require you to put 20 to 30% down, but FHA loans often only require 3.5.%. When you apply you will have to have a good credit rating and a reasonable income to debt ratio. The lender will want to know how you plan to repay the loan once the project is completed.
These loans can be used to build a new custom-designed home and upgrade homes that need major renovations. They can upgrade the electrical system in an older home that needs updating. Electricity in 2019 reached a rate of 10.6 cents per kilowatt, and running an older electric system can actually cost more than a newer one.
Choose A Reputable Lender
Look for banks or lenders that offer construction loans and compare rates before applying. You can try to get prequalified before you consider getting a builder and blueprints. That way you will not spend money on a plan when you cannot secure a loan. Look for an experienced lender and try to find customers who have used your lender and can give you some feedback on the bank or lender.
It is harder to get a construction loan than a regular loan. Finding a good builder that knows the laws of building codes and choosing a reputable lender is the key to success in construction loans.