You are thinking it is time to build your dream home. You have toyed with the idea of buying a home but you want to put your personal touch in yours. Interestingly, you may qualify for a construction loan instead of getting the traditional mortgage.
It is therefore necessary that you understand what a construction loan entails. This will include how a construction loan works, what it is as well as the pros and cons of building your home with the aid of one.
What is a construction loan?
A visit to a site such as Normandy owner builder construction loans will furnish you with a lot of information about this type of loan and how to get one. You will learn that a construction is a high-interest loan that runs on a short term and is used to fund the construction or remodeling of the borrower’s home.
Construction loans are different from traditional home loans in the sense that the home loan is based on the fair market value of the home. It is determined on the condition of the home which is compared to other recent assets.
Construction loans are based on the projected value of the home on completion. These loans come in three packages:
- Construction-to-permanent loans
- Construction-only loans
- Renovation construction loans
Construction-to-permanent Loans
If you have concrete construction plans, this is the type of loan you want.You also need to have a definite timeline. The bank will pay the builder as the construction work is being completed. The cost will then be converted to a mortgage and you will be allowed to lock interest at closing. This translates to steady payments.
Construction-only loans
You must pay a construction-only loan in full once construction is complete. If you have a stash of cash to work with or have a large amount of cash coming in, then this is the perfect fit for you. However, should you need a mortgage to cover costs, you will have to get a lender yourself and get approved a second time.
Renovation construction loans
If you are purchasing a fixer-upper, this type of loan is the best for you. There are also government programs available. The projected cost of renovations is built into the mortgage as is the purchase price.
How do construction loans work?
While traditional loans are paid out by a mortgage company in a lump sum to cover costs, constructions loans are paid out in installments. The lender pays the builder in phases of the construction process until the building is completed.
The installments are known as draws and each one reimburses the builder for the costs required for each phase of the construction. The lender carries out an inspection at each phase for verification purposes before each payout. This inspection also verifies how well the builder is moving on their estimated timeline.
There are pros and cons to these loans and you will need to be well informed before making the decision to apply for any and you are also advised to research by getting information from sites such as Normandy owner builder construction loans to get complete information.
