Know - How Of Home Construction Loans

If you are about to build the home, you must be aware of the intricacy of the mortgage loans for the new constructions. Here in this article, you will learn about the basics of home construction loans if you have decided to construct your own home.

When you go for the construction loans, you must be aware of the fact that there are two types of home construction loans.

• Construction-to-permanent: In this, you borrow to pay for the construction. It is two loans in one. When someone moves into a home, the lender tends to convert the balance of loan into the permanent mortgage.

• Stand-alone Construction: This is two separate loans in which the first loan pays for construction. Besides, when you move into the house, you get to pay off the mortgage as the construction debt.

What Is The Construction To Permanent Loans?

Construction Loans

When you pay for the construction to permanent loan, it reduces the fees you pay. At the time of construction, the buyer pays interest for the outstanding balance. At the construction phase, the interest rate varies with the prime rate moving upward or downward. In addition to that, if there is a rise or fall in the Federal Reserve, the short-term interest rates at the time of house is being built, it will have an impact on the interest rate. It is bound to change.

Apart from that, the lender tends to convert the construction loan into a permanent mortgage, once the contractor has finished the construction of the house. Thus, it is like any other mortgage, in which you can opt a fixed rate or an adjustable rate loan and specify the term period of the loan, which generally can be 15 or 30 years. You can compare and shop mortgage rates.

At the time, when construction begins, the lenders enable the buyers to lock the maximum mortgage rate. Usually, the lenders ask for a minimum of 20% of the down payment of the expected permanent mortgage rate. There might be exceptions too.

What Are Stand-Alone Construction Loans?

In a stand-alone construction loan, you have to see whether it enables you to make a smaller down payment. This plays an advantageous role if you own a home and do not have the sufficient cash amount for the down payment. However, you will get cash once you sell your home. Thus, in this case, while living in the current home, you can wait for the construction of the next house.

Nevertheless, you are paying for the two closings and two sets of fees i.e. loans on the construction and the permanent mortgage. Besides, you are not allowed to lock the maximum mortgage rate. During the time of construction, if there is a rise in the rates, you might have to pay for the higher than the expected interest rate on the permanent loan.

Construction Loan

Do You Qualify For A Construction Loan?

Sometimes, for building a home, it becomes difficult to qualify for the loan, as the lender does not have a complete home as a collateral. In addition to that, the lender is supposed to ask for the details regarding the size of the home, the materials used, and the contractors as well as the subcontractors doing the construction work. Besides, the lender also seeks information whether you are able to make monthly loan payments at the time of construction or not. If the lender does not find you eligible for the same, you will not qualify for the construction loans.

Therefore, you must choose your builder wisely and have adequate savings for the unexpected cost that may arise at any time. You can overcome such ups and downs on contraction loans.