Thursday, August 18, 2022

A Comprehensive Guide on New Construction Loans

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Are you planning to renovate your current home or want to construct a new one instead of finding and buying an already built one? Well, you might need funds to initiate the construction project for your dream home. Let us tell you that the process of getting a mortgage to move into a new existing home is different from the borrowing process for a new construction project. For a construction project, you might need a new construction loan. Here is everything about it in detail.

What is a Construction Loan?

Building a home can be an exciting opportunity of bringing the idea of having your own space to life. But it can be expensive and involves a good amount of money. A home construction loan is a short-term loan that covers the costs involved in building and constructing a new property. Luckily you have new construction loans by your side to provide you with the necessary funds for the construction, materials, permits, and labor. You can also use the construction loans if your construction project becomes more expensive than you planned.

How Do Construction Loans Work?

New construction loans allow future homeowners to get the required amount of money to build a home and pay for the necessary expenses. Often, these loans also allow you to purchase the land you are constructing your dream home on. As these loans are generally taken for construction, they last for about twelve to eighteen months.

Unlike the traditional loans, the new construction loans are not secured by a completed house. In the former type of loan, the lender has the right to seize the borrower’s house if he fails to pay the loan. But in the construction loans, the lender is at more risk as he does not have the option to take over the property in case of failure of loan payment.

Before approving your loan, your lender will first inspect and analyze your construction plans and examine the entire financial situation. Also, your inspector will expect you to have an estimated timeline and budget. If your loan is approved, you will not get all the funds in a lump sum.

Instead, the lender will make the payments in installments or a series of draws as your construction project completes its stages. The construction loan here acts as a line of credit. The payments are scheduled based on the constriction project. The lender will be sending the inspector every time to check on the construction status before making every payment.

What are the Different Types of New Construction Loans?

Let us talk about the different types of construction loans: –

Construction-to-Permanent Loan

In this loan, the lender gives you the money for building your home. Once the house is complete, your loan will be converted to a permanent mortgage. This loan type holds a good advantage. You will only have one set of closing costs to pay. It will reduce your overall fees.

Construction Only Loan

The construction-only loan pays the borrower with the costs to complete the building of the home. But the borrower is responsible for either paying the loan in full maturity or by obtaining a mortgage for securing permanent financing.

The funds in this type of loan will be disbursed based on what percentage of the project is completed. The borrower is also responsible for paying the interest payments on the money drawn.

Renovation Loan

If you are planning to upgrade an existing home rather than entirely building a new one, a home renovation loan would be the right option for you. These loans are of several types depending on the amount of money you are spending on your renovation project.

Cash-out refinance is another viable option in the current low mortgage loan rate environment. Here the homeowners would take a new mortgage at a higher amount compared to their current loan. They will then receive the overage in a lump sum.

Construction Loan Requirements

For a construction loan, you will need a good credit score, a way to prove sufficient income to repay the loan, and a low debt to income ratio. You will also need to make a down payment when you apply for the loan. The amount will depend on the two factors. The borrower you are borrowing from and the amount of money you want to borrow.

Also, lenders want to make sure you have a solid plan. Having a proper and well-designed plan, especially by the construction company you will be working with, will make the lenders feel more confident about your ability to pay back the loan.

Adding an estimation about how much the finished home will be worth at the end of the project would also be an added benefit. The home will be serving as collateral for the loan. So the lenders would like to make sure if the collateral will be sufficient to secure the loan.

What are the Steps to Get a Construction Loan?

Find a Licensed Builder – Whoever the lender be, he will be interested in knowing who will be in charge of the project. If you have friends who have got their houses built, it is better to ask for recommendations.

Get Your Documents Ready – A lender will surely ask for the contract with your builder that will include prices, estimated timeline, and other plans for the projects. Be ready with the proof of business credentials of your builder and necessary references.

Get preapproved – Getting preapproved will provide you with a good understanding of how much you will be able to borrow for your construction project. It is a crucial step to avoid paying for plans from an architect or drawing blueprints for a home that you might not b able to afford.

Conclusion

Make a list of all the eligible lenders and obtain information about their specific programs and loan procedures. Compare their construction loan rates, down payment requirements, and terms and conditions. It will help you in getting the best deal available for your situation.

RCD Capital is one of the most trustworthy money lenders and also provides a variety of business loans for real estate and new construction. You can get in touch with them for more information.

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