If you are dreaming of building a home, then construction loan is designed to give you the funds you need to complete it. Construction loans are based on what the projected value of the home will be once the work is complete. It covers the cost of building your home and sometimes also the price of the land or plot that is being developed. Generally, the funds are released directly to the builder in a systematic manner and the payment is made as per the progress and stages of completion of construction. These funds cover the cost of material, labor, permits, and other costs related to construction of the property.
These short-term loans usually cover only the time and cost of construction of a home and must be converted to a mortgage loan if not paid off on completion. Some construction loans maybe set at only interest, for 12 months after which the loans are converted into principal and interest for a fixed tenure.
Why Construction Loans?
Construction loans allows you to build a home of your dreams. An approved builder, a good project plan and estimate can get you immediate construction loan with flexibility in guidelines and loan terms on your project. The projects phased out way of funds disbursement provides more scrutiny and checks during the building process. It ensures that your project stays on budget and schedule.
Factors impacting construction loan
- You want to build your dream home
- As a new owner you want money to build that home
- You have a detailed plan on the layout, progress details and estimated cost of your future home
- Builder may have to be approved by the lender
- Repayment plan and creditworthiness of the borrower
We keep it simple
- An independent survey of the property and the builder’s contract is evaluated
- Loan is approved once the plan and estimates are approved
- The first installment (known as draws) is disbursed when builder starts the initial pre-construction work
- Regular inspections are conducted before disbursement of future installments
- Future installments too are released by the lender as per fixed schedule depending on the progress of construction
- Enjoy a reduced interest, as you pay interest only on the disbursed amount for 12 months or until the completion of construction
- Progress payment ensures standard and satisfactory work before providing any further funds and covers you against financial loss
- Convert your construction loan to a standard long-term mortgage loan on completion of the construction
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Types Of Construction Loans
- Construction-to-permanent loans
These loans are good as you have a definite construction plans and timelines in place and the loan is converted to a permanent mortgage once building is completed. In this type of loan, all financing is rolled into a single transaction, making financing your home simpler and potentially cheaper. This type of loan allows you to lock interest rates at closing as the bank pays the builder only when the work is being completed, which makes for steady payments.
- Construction-only loans
These loans must be paid off in full on completion of the construction of the building. These funds received will cover only the cost of construction. It is a good choice if you are confident that the proceeds from the sale of your current home will cover the construction cost. A separate loan will have to be taken from another lender to refinance the construction loan into a mortgage.
This type of loans does give you the freedom to shop around for the mortgage that is best you in rates and terms offered by lenders. It will also invite two separate application processes and two separate closings leading to extra documentation and paperwork and may cost more money on overall closing costs.
- Renovation construction loans:
Renovation loan allows you to buy a fixer-upper home to renovate and rehab instead of building a whole new house. Homeowners who want to fix up the home they currently live in can refinance into renovation mortgages, giving them the funds to renovate their current home.