Building a construction project, be it your home or a space for commercial purposes, is a rather exciting prospect for anyone. But it can also be very expensive. Fortunately, construction loan programs exist to provide you with the resources you need to see your project from start to finish.
Construction loans are a short-term financing solution that helps builders pay for construction costs, such as paying for the land, materials, and labor that go into a construction project.
A construction loan can also help you access contingency reserves if your project costs you a lot more than you had budgeted for.
That said, let’s demystify how construction loans operate and the benefits they have to offer.
How Construction Loans Work
As explained earlier, construction loans allow future homeowners and business owners to borrow money so they can buy building materials and pay for labor. The money can also be used to buy the land you’re constructing on, but if the land already belongs to you, you can use it as collateral for your loan, click here to get more information.
Since the construction loan is intended to cover the building costs, they’re often issued for a period of between 12 to 18 months. However, a construction-to-permanent loan, which is a special type of construction loan, can transform into a permanent mortgage once the construction project is complete.
Acquiring a Construction Loan
Unlike regular mortgages, construction loans aren’t secured by a house. As such, the application and approval process is very intricate and complicated. The lender will want to examine the project in detail, including the architectural plans, construction timeline, as well as your credit status.
Lenders often require loanees to have a minimum credit score of 680 or higher so they can be eligible for a construction loan. Moreover, the loanee should also have enough income to make payments on the construction loan. As such, you may be asked for financial statements as proof of your annual income.
The financier will also consider your debt-to-income ratio. The lower it is, the more flexible you will be with servicing your loan every month. You also need to make a down payment, usually around 20% to 30%, but some construction loan programs may allow less.
When approved for a loan, you won’t receive the total sum. Instead, the financier will pay the builder in installments as they complete several stages of construction.
If you’ve been approved for a construction loan, here are some of the benefits you can expect:
Benefits of Construction Loans
1. The Freedom of Choice
In a world where most properties on the market are pre-built, a construction loan will help you design and build your property as per your preferences and design. You don’t have to look for something close enough to your ideal home or business space since you can build your project from the ground up… literally.
2. Convert to a Permanent Loan
As highlighted above, construction loans can transition to a permanent mortgage allowing you to negotiate a favorable interest rate. This will give you enough time to pay back your loans if you’re finding it hard to raise funds to repay the construction loan.
3. Extra Scrutiny on Your Builder
When it comes to construction, you can always do it with an extra pair of eyes scrutinizing your project, especially if it’s your first construction project.
For the lender to consent to give you a loan, they need to assess your builder in fine detail. For the builder to get paid, they will have to adhere to the construction milestones within the proposed time. This means they will be motivated to get the job done in time and within a set budget.
The Final Word
You’re going to need some capital if you’re trying to construct a new building or making renovations to an existing structure. A construction loan should help you get the funds you need to make your vision a reality.
With so many construction loan lenders in the business, it can all be too overwhelming but don’t rush and settle for the first lender you come across. Factor in what types of construction loans they offer, their interest rates, and whether or not they charge any hidden fees.
All in all, make sure you work with a lender who fits your needs.