Need a Construction Loan? Here Are Some Things You Need to Know About Getting One

If you’re planning to build your home from scratch and personalize it to your taste, then construction would be your best bet, rather than purchasing an already built building.

However, construction unlike buying a ready-house is not cheap, and this is where construction loans come in. With construction loans, you can offset several payments for materials and even labor, as you can get enough funds to round up your project.

While there are many types of construction loans you can choose from, it’s worth mentioning that, unlike a mortgage, you should expect a more strenuous application and approval process.

How Construction Loans Work

Most construction loans are short-term (usually to be paid off within a year), and attract high-interest rates. After approval, the loans are usually not sent directly to the borrower, rather they’re sent in draws to the contractor. The contractor receives each draw whenever a milestone is reached, according to the terms of the agreement.

A construction loan will cover many aspects of a building project including…

• The cost of designing the home plan.
• The cost of getting land.
• The cost of getting construction permits.
• Closing cost, and other costs associated with construction.

How to Apply for a Construction Loan

Before applying for a construction loan, you need to have ready a plan for your home. No lender will give you a loan without first seeing the plan for your home construction.

When applying for a construction loan, you must include the following information in your application.

• The plan for the home
• The lot and size of the home
• The lot placement
• Contractors to be hired
• Building materials for the home
• Timeline for completion of the building
• Intended renovation types

All this information is necessary for the lender to approve your application. The essence is for the lender to know how much your home will be worth once it is finished just in case you default on repaying your loan.

What Qualifies You for a Construction Loan?

After sending your application to your mortgage lender, whether you qualify for the loan will depend on several things including, but not limited to your credit score, your debt-to-income (DTI) ratio, and your down payment.

Types of Construction Loans You Can Apply For

Construction loans come in three major types:

Construction Only Loan Type: For those with limited capital. Borrowers of this type of loan are expected to pay off the loan at the end of the construction.

Construction-To-Permanent Loan Type: This type of construction loan converts to a mortgage once the home is finished.

Renovation Construction Loan Type: For those looking to carry out serious home remodeling, this type of loan can help to cover the cost.

Conclusion

Now that you know what to expect when applying for a construction loan, you can get into it already prepared and increase your chances of approval.