When you can’t find the home of your dreams, there’s another option available: build it. A construction loan is a great financing solution to help you get into a new home.
Construction loans are quite different from traditional mortgages. But they’re not complicated once you understand how they work.
Construction Loan Basics
There are many types of construction loans, but the most common is what is called a construction-to-permanent loan. This loan type allows you to build on your own land or purchase a build-ready lot, then work with a qualified homebuilder to make your vision a reality.
With a construction-to-permanent loan, the money to build your home is paid out by the lender in increments during construction. During the construction phase, you’ll make interest-only payments on the funds that are used, which will keep your payments relatively low. Whether you’re currently paying rent or making a mortgage payment, this will help you save money while waiting for your home to be built.
After each construction milestone is completed, the lender will have the work inspected before releasing funds for the next milestone. After your home is built, your lender will have it inspected once more before converting your construction loan into a permanent home loan. At this point, the loan principal is converted into a traditional mortgage with a monthly payment that will include principle, interest, and escrow, if applicable.
How to Qualify
The main difference between a construction loan and a traditional mortgage is that you’re financing something that hasn’t yet been built. For this reason, qualifying for a construction loan is a bit more complex than qualifying for a regular mortgage.
For instance, your lender will usually require you to make a higher down payment. With a traditional mortgage, you can put down as little as 3% of the home’s purchase price. For a construction-to-permanent loan, most lenders require a 10%-20% down payment, depending on the loan you’re preapproved for.
Typically, borrowers also need a higher credit score for a construction loan than they would for a traditional mortgage. Otherwise, getting preapproved is pretty much the same. The lender will look at your income, assets, debts, and credit history to see how much you can afford.
At the same time, your lender will need assurance that you are serious about your construction project. This means you’ll have to provide the lender with a project timetable, a budget, floor plans, an executed construction contract, and a list of building materials. Your homebuilder will help you create these required items.
What to Expect
If you are thinking about getting a construction loan, it helps to be practical about your budget and plan ahead.
For example, building costs almost always run higher than expected. That’s especially the case in today’s market. A heavy storm could stretch out the construction process, and material and labor costs can change, too. Your lender will require you to prepare for these unforeseen project costs by placing extra funds in what is called a contingency reserve.
Many construction loans also involve inspection fees and a second origination fee when the loan is converted to a permanent mortgage. But there are construction-to-permanent loan products that don’t include these costs.
In fact, Right by You Mortgage offers a construction-to-permanent loan in which you pay no charges for periodic inspections.1 You can even lock in your permanent mortgage rate during the construction phase and pay no additional origination fee.2
We call it our One-Time Close Construction Loan because there’s just one closing. This saves time and money while ensuring a reliable, consistent funding disbursements and a smooth construction process. Plus, borrowers can lock in their permanent mortgage rate during the construction phase for added peace of mind!
Our One-Time Close Construction Loan provides up to 80% financing for a new home. However, we also offer a Two-Time Close Construction Loan that provides up to 90% financing for a new home. There is a second closing for the permanent loan, but there’s no origination fee on your permanent mortgage.
If you have more questions or you’re interested in learning more about the Right by You Mortgage construction loan programs, one of our local loan experts would be happy to help. Simply give us a call at 1-877-552-2242 or contact us at inquiries@rightbyyoumortgage.com.
1. No charge for periodic inspections within 40-miles of a Fidelity Bank branch. An inspection fee of approximately $75 will apply for homes more than 40-miles from a Fidelity Bank branch.
2. An origination fee will apply for the construction loan
