This Guide explains Everything You Need to Know About Construction Loans

This Guide explains Everything You Need to Know About Construction Loans

The process of building your home can be very rewarding. Building a home allows you to design everything from scratch. Building your home can be cheaper than selling your old property and paying a realty agent. You can often save up to 20% on the asking price of a typical home in this area. Even if you plan to sell your property in a few more years, you can still make a lot of money. Let’s take a look at one way you can finance your home’s Construction Loans. Here’s the scoop:

What is a Construction Loan?

A construction loan is for people who are looking to buy a home or renovate an existing one. In other words, a construction loan is a loan that lets you borrow money to build or repair a home that doesn’t exist yet.

Construction loans are available for anyone thinking of building a new house. This type of loan may be the best way to help you save money, if you aren’t sure how much your house will cost.

How does it work?

The process of getting a construction loan is simple. The first step is to go to a lender or bank and get a construction loan commitment. This is confirmation that you can obtain a construction loan and how much money you will be allowed to borrow.

Once you have a signed construction loan commitment, you can start to approach a builder. The bank will let you know how much money you can borrow. Once you’ve determined how much money you can borrow, it is possible to meet with a builder and discuss the cost of building your dream home.

How to Apply For a Construction Loan

Check Your Credit Score

A copy of your credit history is the first thing most banks require before they give you a construction loan. Check your credit report for errors. If there are any inaccuracies you need to dispute them with your credit bureau and have them corrected as soon as possible.

Pre-Approval for a Bank

If you have poor credit, it can be difficult to get a construction loan. You should be able obtain a construction loan if your credit score is good. A pre-approval letter is required before you can look at any other properties. This will demonstrate to the builder that your seriousness about building the house.

Search for a Loan Officer

Before you begin, the last thing that you should do is find a banker who will help you. A banker who is experienced in building homes will be a great choice for a first-time home builder. The entire process will be easier if the loan officer has a background in construction loans.

The Bottom Line

It is important to be ready before you begin to get a construction loan. A bank preapproval is a crucial step every builder must take. It shows the bank that you are serious about your plans to build. It will also make it much easier for you get approved.

Construction Loan

This is becoming more common because “housing inventories have been sitting around record lows,” Andrina Vades, chief operating officer at Cornerstone Home Lending Inc., says. Homebuyers are building more homes even though there’s not a lot to choose from.

A loan to finance the construction of a home can pay for the cost of the land as well as the purchase price. Two options are available: You can get a loan for construction and later obtain a mortgage or a loan for construction only.

What are the different types of home construction loans?

Buyers can choose between a single-close construction-to-permanent loan or a two-close, stand-alone construction loan.

The main difference is A one time-close construction loan allows short-term construction financing and long-term financing to be secured together, Valdes states. However, a two-time construction loan will require approval for two loans and two closings.

Construction-to-permanent, or C2P, loan: It funds the land and the construction, and then the loan converts into a permanent mortgage once the construction is complete. The interest-only payments made by borrowers during the construction phase can make this loan more expensive than a traditional mortgage. If the loan is converted to a conventional mortgage, the payment schedule may be adjusted based on how long the loan term remains.

C2P loans offer a time-saving advantage in that the borrower is only required to complete underwriting once and close once. The loan also offers another benefit during construction.

“If your job is lost, a medical collection appears on your credit report, or any other disqualifying factor, it will not affect the permanent loans as they are already closed,” Melinda Williams (founder of says. Williams was a former mortgage loan officer.

She says you will also lock in a fixed rate on your permanent loan. This “protects against interest rate fluctuations throughout the construction phase.”

This is a stand-alone loan for construction. It can be used to pay for the building of your home. The percentage of work done by the lender determines how much money is disbursed to the builder. Interest is charged on withdrawals. Borrower must repay the loan within a year or obtain a new mortgage.

Valdes says that your personal financial situation and eligibility will determine the type of mortgage to which you can convert your loan. To be eligible for a VA-one-time-close construction loan you will need to be an active-duty soldier, veteran or spouse.

If you are going to need a permanent loan, a standalone construction loan may be more costly than a conventional C2P loan. Because you will have two loan transactions, each with its own closing costs, and you may pay a higher rate for the permanent loan, you might be subject to additional interest rates.

What are the requirements for construction loans?

You will need to meet the following requirements if you are looking for a loan to build your home:

High credit score For conventional loans, you may need to have a credit score above 700. However, some lenders may allow for more flexible criteria. The Federal Housing Administration, Department of Veterans Affairs, and Department of Agriculture may have lower credit requirements.

Large down payment. Loan types will have different down payments. While you may be able put down 5% for a conventional mortgage loan, a construction loan might require that you pay at least 20%. Ask your lender about how to get a loan for construction without any money down. FHA loans have a minimum down payment of 3.5%. USDA and VA loans might not require any.

A licensed, reputable builder. This will ensure that your lender is satisfied with the builder’s ability to pay suppliers and complete the construction project. The builder must provide proof of insurance, professional licenses and references to vendors that detail payment history. The lender will also check the builder’s financial standing and credit rating.

The standard for borrowers who seek a construction loan over a traditional mortgage is generally higher. The reason is that there is no collateral for the loan – the home hasn’t been built yet.