What is a construction loan? A construction loan is a short-term loan used to pay for the cost of building a home. These loans are unique in that they offer a couple of different options to home builders allowing for one or two closings depending on circumstances.
Because a bank is placing a lot of trust in a builder and lending for something that is to be built, there are a few requirements that customers need to meet to qualify for a construction loan. These usually include the following:
- Your builder must be a licensed North Carolina contractor with an established reputation. Generally, you will have a difficult, if not near impossible, time finding an institution to finance your project if you are intending to act as your own general contractor.
- You must provide your lender with detailed specifications. This will include floor plans, details regarding materials and building elevations.
- The home value must be estimated by an appraiser. This is why it’s so important to have a detailed set of plans and specifications. It’s difficult to appraise a home when it hasn’t been built yet. But, with detailed plans and taking into consideration the value of the land, the calculations can be done.
- A substantial down-payment. Building a home requires a larger down payment than purchasing a home. This ensures you are invested in the project and you won’t just walk away if things go wrong.
Providing you meet these criteria, you will then need to provide your lender with the information they require for any type of standard mortgage loan. Your loan officer can provide you with a comprehensive list, but you should be prepared to provide financial information regarding your income, your current home and any debt you may have.
Understand what you are applying for.
There are 2 main types of construction loans:
- Construction-to-permanent: This is a one-time closing option. During construction you pay interest only on the outstanding loan balance. The loan converts into a mortgage after construction is completed. You may choose a program where you have the option of locking in your maximum mortgage rate at the beginning of construction. This is by far the more popular option.
- Stand-alone construction: This is a two-time closing option. You first close on a construction loan which will advance the money to the builder for your home constructions costs. Then once the project is complete, you get a mortgage to pay off the construction loan. Stand-alone construction is sometimes beneficial to those who desire to do a small down payment, but you will be required to pay for 2 closings.
If you have questions, we have answers. Reach out to a mortgage loan officer to schedule an appointment and get started today.
Read the next article in the series: