Construction Loan Tips For Your Dream Home
There is nothing as exciting and stressful as building a new home. It is an opportunity to build a personal space that meets the needs of the family and fits your budget and lifestyle. It should not come as a surprise that the costs can add up very quickly. One thing leads to another and the total cost of building the dream home could be way higher than you estimated. A lot of us do not have the cash to make payment for the construction right away and this is where construction loans make all the difference. Most people are not aware of how construction loans work and that it is different from the traditional mortgage. However, the process could be slightly complicated and if you are feeling overwhelmed with all the information, don’t be! Here are a few construction loan tips you must consider before building the dream home.
1. Have a plan
If you want the lender to approve the land purchase for home construction, there should be a detailed plan in place, which includes architectural plans, building permit submission, or approval, cost breakdown of the project, copy of contract with a licensed contractor, and last but not least your credit package, all of which will give the lender an idea of what you will do with the loan and when.
The plan will also help choose the loan type between construction only loan and construction to permanent loan.
2. Figure out how much of a loan you need
Unlike a conventional mortgage which has a straightforward way of calculating the loan amount you will need a home construction loan calculator the figure out the loan amount since a construction loan amount takes all associated expenses into account.
3. Check your credit
When it comes to construction loans, they are high risk for the lender as there is no structure that can be used as collateral. Hence, the entire risk lies on the lender and they will consider your credit score to decide if they want to approve the loan or not. They will examine your credit history and score thoroughly. Hence, you must check the credit score for any discrepancies and pay down the outstanding debts if you can. A higher credit score means a quick loan approval.
4. Build an emergency fund
You will not make the decision to build a home overnight. Once you give it a thorough thought, remember to start saving for it. The loan is high risk for lenders and you may have to make a down payment. The down payment could be 20% or more. Though any expenditure along the way such as lot acquisition, architectural and permit fees etc. will count towards your equity. If you have saved for it, you can get quick approval. Plus, you can also use the savings to handle any unexpected expenses that could arise in the construction process.
5. Apply for the right type of loan
You will find different types of construction loans in the market but there are two most common ones. One is a construction-only loan that has a short tenure, and it will only cover the cost of construction. After the home is complete, you can use a mortgage to refinance it. The second option is the construction to perm loan which will automatically convert into a traditional mortgage once the home is complete. You only pay one closing costs.
Construction loans normally have a higher rate than regular purchase money or refinance loans due to their higher risk factor.
6. Work with a reputed builder
You can get the loan approved by showing your lenders that the project is less risky. When you choose a builder, who enjoys a strong reputation for timely and consistent work, it will work in your favor.
Consider these tips before you apply for a construction loan to build your dream home. If you have a strong credit score and a plan in place, the loan will be approved without much hassle.