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Helping You Build Your American Dream Step-by-Step
Financing Your Construction Project...
If you're like most people, you'll need to get a construction loan to build your
home. These loans are not the same as mortgage loans, and qualifying for one
is a little different too. Following is an outline of the differences and what you'll
need to know to get a construction loan.
Get your "story" together. Unlike mortgage loans that are governed by
standard guidelines, construction loans require a good "story," meaning that
the lender typically wants to know the details of the construction and how you
plan to carry out the project. You'll fill out a specification form spelling out
everything that will go into constructing the house. You'll submit architectural
drawings. And you'll have to explain how you plan to contract the home
yourself.
Understand rates and terms. Most construction loans are short term loans
(usually for one year) that are interest only, variable rate, and are not
amortized--spread out with equal payments over 15 or 30 years--like standard
mortgage loans. Further, your monthly payment will vary depending on the
amount of money you have "drawn" to date each month. Your lender will
provide a draw schedule indicating a percentage of the loan amount that they
will release upon completion of various stages of construction. So the payment
amount will increase as you get "draws" until final completion and the
certificate of occupancy is issued.
Consider a construction-to-permanent loan. Some lenders offer construction-
to-permanent financing options. This means that the construction loan will be
converted to a mortgage loan after the certificate of occupancy is issued. Often
this means that you only have one closing and only pay closing costs once.
However, there's not as much flexibility in the interest rate charged for the
permanent mortgage loan. You should talk to you lender about all these issues
before making a decision.
Review your loan qualifications. It goes without saying that you will need a
respectable credit score to get a construction loan. If your credit is marginal,
it's probably not the time to apply for construction financing. Why? Lenders
are taking a risk with your project and they are not willing to bet on you if
you've never contracted a house before AND you have credit issues. You
essentially become partners with your construction lender. They want to feel
confident that your project will be successful on all fronts.
Have some cash on hand. Unlike a standard mortgage where you can borrow
upwards of 100% of the price of the home (this is rapidly becoming a thing of
the past though), you'll have to have some downpayment and/or equity in the
project. Construction lenders want you to be invested ion the project. If you
already own the land you plan to build on, then getting a construction loan will
be much easier. Your land will be considered the "equity" in the project and a
security for the lender. If you don't, then you will have to work harder to
demonstrate that you are capable to complete the project. It's not impossible
though.
Calculate the amount you can borrow. Before you purchase a lot, choose
floor plans and determine the amount of money to borrow for construction
costs, you’ll need to have an idea of what size mortgage you can afford.
In general, there are three basic considerations:
As a general guideline, most people will qualify for monthly mortgage
payments—which include principal, interest, taxes and insurance—equal to
approximately one-third to one-fourth of their total monthly income. Use the
loan calculator to determine monthly payments for various loan amounts.
Enjoy browsing our website and then buy our e-book, The Ultimate Guide to
Building Your Own Home: Save 30% to 40% on the Cost of Your New
Home for an in-depth look at the entire process including many insider tricks
and secrets!
If you're like most people, you'll need to get a construction loan to build your
home. These loans are not the same as mortgage loans, and qualifying for one
is a little different too. Following is an outline of the differences and what you'll
need to know to get a construction loan.
Get your "story" together. Unlike mortgage loans that are governed by
standard guidelines, construction loans require a good "story," meaning that
the lender typically wants to know the details of the construction and how you
plan to carry out the project. You'll fill out a specification form spelling out
everything that will go into constructing the house. You'll submit architectural
drawings. And you'll have to explain how you plan to contract the home
yourself.
Understand rates and terms. Most construction loans are short term loans
(usually for one year) that are interest only, variable rate, and are not
amortized--spread out with equal payments over 15 or 30 years--like standard
mortgage loans. Further, your monthly payment will vary depending on the
amount of money you have "drawn" to date each month. Your lender will
provide a draw schedule indicating a percentage of the loan amount that they
will release upon completion of various stages of construction. So the payment
amount will increase as you get "draws" until final completion and the
certificate of occupancy is issued.
Consider a construction-to-permanent loan. Some lenders offer construction-
to-permanent financing options. This means that the construction loan will be
converted to a mortgage loan after the certificate of occupancy is issued. Often
this means that you only have one closing and only pay closing costs once.
However, there's not as much flexibility in the interest rate charged for the
permanent mortgage loan. You should talk to you lender about all these issues
before making a decision.
Review your loan qualifications. It goes without saying that you will need a
respectable credit score to get a construction loan. If your credit is marginal,
it's probably not the time to apply for construction financing. Why? Lenders
are taking a risk with your project and they are not willing to bet on you if
you've never contracted a house before AND you have credit issues. You
essentially become partners with your construction lender. They want to feel
confident that your project will be successful on all fronts.
Have some cash on hand. Unlike a standard mortgage where you can borrow
upwards of 100% of the price of the home (this is rapidly becoming a thing of
the past though), you'll have to have some downpayment and/or equity in the
project. Construction lenders want you to be invested ion the project. If you
already own the land you plan to build on, then getting a construction loan will
be much easier. Your land will be considered the "equity" in the project and a
security for the lender. If you don't, then you will have to work harder to
demonstrate that you are capable to complete the project. It's not impossible
though.
Calculate the amount you can borrow. Before you purchase a lot, choose
floor plans and determine the amount of money to borrow for construction
costs, you’ll need to have an idea of what size mortgage you can afford.
In general, there are three basic considerations:
- The monthly mortgage payments you qualify for (or are comfortable with),
- The amount of money you have to invest as a down payment,
- The type of loan you choose.
As a general guideline, most people will qualify for monthly mortgage
payments—which include principal, interest, taxes and insurance—equal to
approximately one-third to one-fourth of their total monthly income. Use the
loan calculator to determine monthly payments for various loan amounts.
Enjoy browsing our website and then buy our e-book, The Ultimate Guide to
Building Your Own Home: Save 30% to 40% on the Cost of Your New
Home for an in-depth look at the entire process including many insider tricks
and secrets!
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