Everything You Should Know About Construction Loans

Have you decided on building your own home instead of buying an existing one? If

Have you decided on building your own home instead of buying an existing one? If so, it might come as a surprise to you that you will not get a traditional mortgage. Alternatively, you will usually get a construction loan.

As such, we have put together everything you should know about construction loans.

What are construction loans?

Construction loans are those shorter-term loans with higher interest used to cover the rehabilitating or building of a house. Compared to traditional home loans, construction loans are based on your home’s projected value once all of the work is good.

There are three types of construction loans. These include:

Construction-to-permanent loans

These are the loans that are good if you have definite timelines and construction plans in place. With this type of loan, the bank will pay the builder while completing the house. Afterward, the cost converts into a mortgage at closing. This loan type lets you lock interest rates at closing making steady payments.

Construction-only loans

On the other hand, construction-only loans are those who should be fully paid once you nearly finish your house or building. If you have a lot of spare cash, this is a great choice. As such, if you need a mortgage to cover all of the cost, you need to look for the lender yourself or be approved for a second time around.

Renovation construction loans

If you are buying a fixer-upper, this is the perfect loan type for you. Government programs are available for this loan, and the renovation projected cost is wrapped along with the mortgage and purchase price.

Sometimes, you might hear about the one-time close construction loans texas. It is a product which can allow you to combine financing for construction, lot purchase and permanent mortgage in just one first mortgage loan.

How construction loans work

Mortgage companies pay traditional loans to cover the home’s cost in just one lump-sum at closing. On the other hand, construction loans are paid out via installments. A bank pays the builder while the building is under construction. The overall cost will then be transferred to you, the homeowner, as soon as the whole project okay.

Installments such as these are also “draws.” Each one allows reimbursements to the builder for all the costs that are used to cover the building’s phase. What does this mean? It means that you or they need to have enough money on hand to cover all of the upfront costs.

Before they do the draws, the bank will first verify via inspection the estimated overall cost of the current building’s phase, including if the builder is going the same as the projected timeline.

Pros and Cons of Construction loans

There are advantages to construction loans. These include being interest-only during construction. Flexible terms added scrutiny.

On the other hand, the cons of construction loans include being harder to qualify for, high-interest rates, and more risk when it comes to short term loans.

Do you have any questions regarding construction loans? Let us know in the comments.