Are you ready for a new home, but don’t want one that looks like every other home in the neighborhood? If you want to build a custom home, chances are you will need a construction loan. These loans are temporary and will be paid off when construction is complete. The loans typically have a variable interest rate and you pay only the interest during construction. Once the inspector gives you a certificate of occupancy, your construction loan will usually convert to permanent financing which will be your home mortgage. Construction loans can be difficult to get because the lender is banking on something that is not yet completed.
When you go into ask for a construction loan, it is a good idea to have all your documentation with you. Prepare a detailed plan of the construction schedule and each phase. If you are using a builder, you might want to ask them if they would carry the construction loan and then you pick up when the construction is complete. If the builder is not interested in doing this, then you will probably need to get a construction loan.
Banks and lenders are generally pretty leery of construction loans. Again, they are lending on a project that is not completed. This type of loan also places a great deal of faith in the builder. If something goes wrong during construction, such as the builder going bankrupt, the bank is on the line for the loan. This is why hard money lenders are a good second option.
There are usually very strict criteria to qualify for a construction loan. First, most lenders want a qualified builder overseeing the project. If you want to be your own general contractor, it can be very difficult to get a construction loan.
Next, the lender will want all the details, in writing for the project. They will want to see the floor plans and specifications about the materials and subcontractors being used. Many builders will put together a comprehensive list that includes all of this information and provides it to the lender.
The lender will require that an appraiser studies the information provided by the builder as well as the floor plans and house specifications and provide an opinion on the value of the home. Appraisers will often use comps to determine an overall value for the finished home.
Lenders will require a large down payment, often as much as 25% before they will approve a construction loan. This is how the bank ensures you are invested in the home and will stick with getting the project completed. It also protects the bank should the home not be worth the value of the construction loan when it is completed.
If you have good credit and a qualifying income, you should be able to get a construction loan. Most banks or lenders will want to see proof of income just like with a regular mortgage and will typically stay involved in the process throughout construction.
Getting a construction loan is possible, but it requires a great deal of preparation. Gather all your documentation and select a builder before you approach a lender for a loan.