Construction loans are a great way to get the financing you need to move your project forward. Before you take out a loan, there are five things you should keep in mind before signing the papers. Learn these facts to give you more peace of mind.
Know the Different Types of Construction Loans
There are two main types of construction loans: construction-to-permanent and standalone construction. Construction-to-permanent loans are the most common, as they roll your financing and permanent mortgage into one loan. This means you’ll only have to go through the application and closing process once.
Standalone loans are less common, but they may be the right choice for you if you’re not planning on moving into the home you’re building right away. With this type of loan, you’ll apply and close on two separate loans: one for the construction phase, and one for the permanent mortgage.
Be Prepared to Put Down a Large Down Payment
Construction loans typically require a larger down payment than traditional mortgages, often 20% or more. This is because these loans are riskier for lenders – after all, they’re lending you money to build a home that doesn’t exist yet.
If you don’t have the cash on hand to make a large down payment, you may be able to finance your down payment with a land equity loan or line of credit. Or, if you have a lot of home equity built up in your current home, you may be able to use a cash-out refinance
Your Credit Score Matters
Your credit score will have a dramatic effect on the amount of construction financing you are offered, and the terms. Make sure that your credit score is high enough to get the best rates before you apply. Check for mistakes on your report and clear up any past-due accounts. Loans for construction are hard to get on their own, if you have less than stellar credit you may not qualify.
Secure Your Construction Plans
Before you can apply or even be approved for a loan, you need to have concrete plans already completed. This may mean that you need to invest your own money into hiring a construction architect to draw up plans and get approval long before you actually have funding. Lenders look for detailed plans, completion estimates, and other project specifics when considering a construction loan.
Construction Loan Rate Differences
The interest rates on mortgages and those on construction loans vary greatly. It is important to know how they differ and their fluctuations. Loans for construction will also always be higher than traditional mortgages. They are much shorter in duration which is the main reason the rates are higher.