Construction Loans and Owner Builder Mortgage

Construction Loan

Do you prefer building your dream home from scratch rather than purchasing an existing property? If your answer is yes and you are yet to have the budget, construction loans are available to apply for. Here’s what you need to know about this type of home loan.

What is a Construction Loan?

The construction loan is meant for people wanting to build a new home. It’s not created the same way as the typical mortgage because here, the lender will check the total amount you owe the builder. The lender will then divide this into separate payments known as “draws”.

Draws are normally divided between project milestones. For instance, the contractor gets paid after doing the house’s planning and foundation.

Most lenders will only require payment of the interest due on the amounts that were already drawn. So often, the whole principal and the interest payments don’t start until the home is finished.

Who Needs This Type of Loan?

Construction loans are suitable for the following:

  • Those who plan to build a house on an empty block of land – this applies to both newly purchased and previously owned lands.
  • Those who want to renovate existing homes – some lenders call this a renovation loan.

Types of Construction Loans

What happens next once the home is finished would depend on the type of construction loan obtained.

  1. Construction-only loan

The whole balance of the loan becomes due when the entire construction gets finished. Therefore, another mortgage is needed for the payment of the construction mortgage.

  1. Construction-to-permanent loan

The construction loan will return to being a regular mortgage with full principal and interest repayments.

Main Points to Consider in Choosing a Construction Loan

The numbers presented by a lender can be overwhelming. Here are the main points you must check before deciding if the loan is worth it:

  • Interest rates – construction loans are normally interest-only. This affects the payments needed while the house is being built.
  • Fees – this includes additional administrative fees and standard closing costs.
  • Terms – check the terms of the loan, such as the period given to finish building the home.
  • Eligibility criteria – construction homes are available only to those who have a good credit history. This is to mitigate the risk involved for the lender. The required credit score varies among lenders.
  • Down payment – This type of loan has a higher down payment – between 20% and 30%.

What Happens When the Building Contract Changes?

Unexpected events might occur, such as a change in material that can increase the home’s price. In some cases, the lender may agree to adjust the mortgage amount to account for the difference. However, this doesn’t always happen.

Make sure to have emergency cash on hand in case you need to cover the costs on your own. To avoid stress, finalise the contract first before submitting it to the lender.

Things to Remember When Building a Home

  1. Seek first a preapproval from the lender or bank before making plans. This will make you certain of the amount you can spend on the land and construction costs.
  2. Review the contractor’s license. You can check this on the state’s .gov webpage.
  3. Review the contractor’s qualifications. He must also be fully insured and has excellent reviews.
  4. Ask about the timeframe they need to finish construction. If possible, have it documented in writing.
  5. Ask about how draws are made. Additional steps might be needed, such as inspecting the house after every milestone. Try to find about the submission process for every milestone – can it be done online or via mail only?

Get the Best Construction Loans by Comparing Your Options at Makes Cents

Building your own home allows you to customise its features exactly how you want them. Getting a construction loan will help you manage the building process at every step. However, you need to review the terms carefully to make sure you’re making the right decision. Visit Makes Cents to help you know more about a specific loan or lender.

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