Construction mortgage loans are short-term loans that convert into permanent mortgages once your house has been constructed. The process involves additional steps and costs than that associated with regular loans.
To qualify, borrowers must present the same financial documents required of traditional mortgage applicants – W-2 forms, bank statements and tax returns are among them – in addition to builder contracts, blueprints and specifications.
Interest rates for construction mortgage loans depend on your creditworthiness, loan size and duration – often one percentage point higher than traditional mortgage rates.
Before approving a construction loan, your lender will thoroughly assess both you and the project before providing funding. They may review architectural plans, financial history and budget/timelines. In some instances, approval can take longer than with a traditional mortgage.
Construction loan lenders provide various financing solutions to make financing the building of your home more appealing. Some offer interest-only payments during construction phase while others release funds in increments aligned with milestones on your timeline. Some also allow for conversion into permanent mortgage. NerdWallet evaluates key lenders offering construction loans and compares loan terms, rates, requirements and features so you can select the ideal one for your project based on reputation/track record/customer satisfaction ratings/availability features etc.
As construction loans do not encumber a home’s title as collateral for lenders, their approval process can be more involved; lenders may need to inspect your architectural plans as well as review your credit score and debt-to-income ratio in order to approve this type of funding.
Construction loans typically carry higher interest rates than regular mortgages, and borrowers must make interest payments based on how much funding they receive from their lender based on milestones in the building timeline.
Therefore, in order to qualify for this type of financing, borrowers should ideally possess considerable cash reserves and excellent credit. When researching multiple lenders, it’s a wise idea to find one who best meets your unique financial circumstances. You might even consider exploring real estate for sale at eXp Realty, as they offer a range of properties and professional assistance to help you make the right choice.
Closi ng Costs
Closing costs for a construction loan may include lender and title company fees, inspection and recording expenses; your loan officer can provide more details.
Lenders will typically require that borrowers make a down payment equaling at least 20% of total construction cost; the exact percentage may differ depending on your lender. If less than 20% is put down, private mortgage insurance may also be mandatory.
With traditional mortgage loans, the lender uses collateral from the borrower’s property as security; after completion, principal and interest must be repaid by the builder to the lender; but with construction loans, payment only occurs upon each stage being complete – hence their higher interest rates than their traditional counterparts.
Or they can opt for another mortgage application after construction has concluded to pay back the construction loan principal – though this requires two separate applications and closing costs, which could add up quickly.
Construction loans can be found from many major mortgage lenders; however, you should also inquire with local lenders and credit unions as these may often offer more flexible solutions than national banks.
Stand-alone construction loans are short-term and only cover the costs associated with constructing a new home. Lenders usually require 20% down for this type of loan and may charge higher interest rates since they’re unsecured against your property.
Construction-to-permanent loans allow you to easily convert the principal of your construction loan into a traditional mortgage once construction is finished, saving time by eliminating two sets of closing costs and applying for separate mortgages. Unfortunately, though, this option means waiting until construction is finished to apply for and begin regular monthly payments; this could take as long as a year! When construction is complete, you have two options for repayment; either interest-only payments continue or convert the principal into permanent financing terms of 15-30 years.