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10 Amazing Facts About Construction Loans

1 June 2021 No Comment

A lot of people think about building their dream home; however, as a first-time homebuyer, you may not get your dream house that way. In reality, the majority of construction loans are in combination with traditional mortgage loans. However, some are new loans because they’ve already built up equity in their home, their family has grown, or they are at a point in their lives where they can invest in a better or retirement home.

How Construction Loans Work

A construction loan is similar to having a line of credit. What this means is that you don’t have to pay the builder until the work is completed, not upfront. You only pay interest on the principal balance of the construction loan, and it is to be paid monthly.

On average, it takes builders four to six months to construct a home, that is if there aren’t any customizations. Then it can take up to a year depending on what the customer wants. The financing for this project could take up to a year. But if you want to know more about getting new construction loans, keep reading!

1. Construction loans are typically for a limited time only. They are often not designed to last over a year due to the length of time it takes to build a home.

2. Construction loans aren’t always advertised by lenders. Because construction loans are higher-risk investments, lenders may not push them as aggressively as standard mortgages. So, what does this imply for you? To find the best lender, you may need to do some investigative work. The right lender may be right under your nose. It may be with your bank or credit union.

3. The interest rates on construction loans are subject to change without much notice. New construction loans have higher interest rates than typical mortgages. Interest rates will vary depending on the prime rate of the lender and may fluctuate.

4. You may need to save still for a down payment. Because new construction loans are short-term, they carry a larger risk. As a result, lenders may ask their customers to put down more cash upfront. Don’t be startled if your lender demands 20% of the project’s total cost in the beginning.

5. Buyers frequently pay interest only while the house is being built, although a larger down payment is required for a new construction home. Lenders only demand that buyers pay interest while their home is being built because construction loans are short-term agreements.

6. Lenders may want proof of your ability to pay especially for any additional work you may need. Buyers may want to make adjustments to the original design plans in the middle of the construction phase. This is fine, but you know sometimes ‘great ideas’ can be costly. Before borrowing money, make sure you have enough money set aside to cover any unexpected costs.

7. Before approving a loan, lenders may request certain information. New construction lenders may want to see a project timetable and budget plus the usual traditional information when applying for a mortgage.

8. Changes in your financial circumstances could impact your mortgage approval. Any changes to your financial status could impair your ability to roll a new construction loan into a regular mortgage. So, keep your credit, job, and finances in good shape to ensure nothing goes wrong.

9. New construction loans may be added to a conventional loan. Together they make a construction-to-permanent loan. When looking for a new construction loan, keep in mind that you can convert it to a 15–30-year mortgage.

10. Because lenders are concerned about the length of time it takes to build a new home, they may also inspect the work periodically. When submitting a timetable to your lender, it’s wise to include delays in case of bad weather or shipping issues.

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