Everyone wants to build their dream house. But let’s face it, not everyone can afford to pay for the cost of construction and materials. Fortunately, there are programs and financial assistance being offered to help families build their dream home. But the important question is, “how can one get a construction loan?”
Before we discuss the requirements on how to apply for one, let’s discuss what a construction loan is.
What is a Construction Loan?
A construction loan is generally described as a short-term loan that is used to pay for the cost of construction of a home. Unlike a typical mortgage loan, a construction loan isn’t meant to be around for a long time. Usually, the payment is repaid in full within an agreed number of years, or upon completion of the construction.
There are two basic types of construction loan: the one-time-close construction loan and the two-time-close construction loan, both of which have their own sets of advantages and disadvantages.
The one-time-close construction loan, also known as all-in-one loan or construction-to-permanent loan, is a kind of loan that wraps the construction and mortgage into one single loan. This means that there’s only one approval process and closing, which simplifies the process of the loan. The advantage of this is it reduces the hassle of applying for separate construction and permanent financing. Furthermore, it saves you a great deal of money as you only need to pay for one closing. The downside is you have to pay a higher rate for the construction.
Unlike the all-in-one, the two-time-close construction loan has two separate loans, one for the construction phase and the other for permanent financing. Essentially, you need to refinance at the end of the construction and must apply for a brand new loan and get approved, which actually just make the process complicated. Moreover, you have to pay for the closing cost twice since there are two different types of loan involved. The advantage, on the other hand, is you have the option to shop around and choose the kind of permanent financing you desire and sometimes get a much better rate on permanent mortgages.
But keep in mind that no matter what type of loan you choose, you are required to pay an interest rate. The payments for the interest of the loan are made during the construction phase, usually on a monthly basis.
Qualifying for a Construction Loan
There are plenty of banks and mortgage companies willing to finance families who want to build and purchase a new home. But in today’s economy, the application process becomes a little bit tight and difficult. Definitely, lenders want to assure that they get valuable returns on their investments.
To protect themselves from high risk, banks and other financing companies impose strict qualification requirements for this type of loan. The application requirements on how to get a construction loan goes beyond the income and credit qualification of the borrowers. Here is the detailed list of when applying:
- A complete set of building plan (includes foundation plan, floor plan, and materials to be used for the construction)
- Detailed specifications of site plan (include your lot information, location of the house, location of the water lines, the garden, the garage, etc.)
- Cost breakdown (an estimate list of cost for the construction)
- Financial information (includes credit report, financial statements, income verification, etc.)
- An appraisal (ordered by the financial institution)
- Important documents (include building permits, construction insurance, etc.)
Indeed, building a new home can be a challenging and expensive process. But if you really want to provide a beautiful and safe place for your family, where you can build your dreams and tighten your bond, the cost of the construction is definitely worth it. When it comes to building homes, the old saying “you get what you pay for” is especially true.
If you still have questions on how to get a construction loan, go to your nearest bank or mortgage lender and ask for everything you need to know. With careful planning, your dream house will eventually be yours.