A Quick Guide to Getting a Construction Loan
As we have previously stated throughout the Buildversity course, constructing your home will not be the most glamorous experience, but it will be rewarding! You will come across multiple stressful situations during the process, but don’t forget you have all the resources you need, and you can do this. Some of these stressful situations include finding the best location, correct floor plan and the ideal design. However, you will not be able to go ahead with any of these without construction financing, unless you are paying for everything out of pocket. Therefore, we will now take a look at a construction loan.
So, what is a construction loan?
A construction loan is quite different from a mortgage loan, which you may be more familiar with. A construction loan is a short-term loan used to execute the build of your new home. The loan duration is not more than 12 months. You can use the loan amount to cover all the expenses that you will come across during the time of constructing your house. You can even use the loan to acquire the property of your new home.
After obtaining a construction loan, you will be able to pay a percentage of the funds as equity. This is typically around 10% to 20%. Along with that, you will be sharing the risk associated with your house construction project along with the lender.
How to get your construction loan?
Even though the process you have to follow when obtaining a construction loan looks similar to a mortgage loan, there are some additional requirements that you need to adhere to. Before the application, you should meet an architect, get your house plan drawn and establish your budget to get an estimation of the cost to build. Then you will be able to determine how much loan amount you are obtaining.
The lender will take a look at your savings, employment history, ability to repay and income stability before approving your application to obtain a construction loan. In addition to that, a property appraisal will be done. This is done with the objective of supporting the value of collateral.
Please note, to be eligible for a construction loan, you should have a stable income and excellent credit. Moreover, your debt to income ratio should be as low as possible. On top of that, you need to have the ability to make a down-payment of at least 20%.
Things you need to consider before you get a construction loan
Before you find a lender to get the construction loan that best suits you, you should have a very clear timeline and budget of your build. Make sure to review as many details as possible throughout your timeline to ensure the best accuracy. For example, bad weather conditions can create a negative impact on your construction projects and will slow you down. You will also need to take a look at the closing expenses as well as other fees associated with getting a construction loan and be sure to include that in your budget. Then you will be able to understand the most cost-effective option available to consider.
Finding your lender
Be sure to do as much research as possible on various loan types and be sure to talk to a few lenders. While you are comparing lenders, you should take a look at the terms, loan rates and down payment. Then you can secure the best deal according to your requirement and proceed obtaining your construction loan and beginning your build!
