**Title: Comprehensive Guide to Construction Loans: Building Your Dream Home**
**Introduction**
Finding the perfect house can be a fun yet challenging endeavor. With so many factors to consider while house hunting including style, size, and location it can be tough to know where to start. This process can sometimes lead to houses that dont quite match your dreams. The good news? Even if you cant find the perfect home, you can build a new one that is just right for you. To finance this build, youll need to know about construction loans.
**What Is A Construction Loan?**
A construction loan is a short-term loan that covers only the costs of custom home building. This is different from a mortgage, and its considered specialty financing. Once the home is built, the owner must apply for a mortgage to pay for the completed home. While O1ne Mortgage Inc. doesnt finance construction loans, we can help you when it comes time to convert this to a permanent mortgage.
**Construction Loans Vs. Traditional Mortgages**
There are several key differences between a construction loan and a traditional mortgage. Construction loans are short-term loans, usually no longer than a year in length. On the other hand, traditional mortgages are long-term loans, with terms typically ranging from 15 to 30 years. With a mortgage, the borrower receives the money in one lump sum. Upon closing on the loan, the payments start immediately and consist of both principal and interest.
When you take out a construction loan, youll usually make interest-only payments while the construction is being completed. Construction loans also tend to have higher interest rates than most home loans because they are considered to be more risky for lenders.
**How Do Construction Loans Work?**
You can use a construction loan to cover the total cost of building a home, including the land, labor, materials, and permits. The approval process for a construction loan is similar to that of a typical mortgage in that youll need to apply and submit documentation to your lender.
Once approved, youll be able to start accessing the funds in conjunction with each phase of construction. An appraiser or inspector will check in on the build throughout the construction process so that the borrower can continue to have access to funds.
After the homes construction is complete, youll be issued a certificate of occupancy. Then, your construction loan will likely be converted to a traditional mortgage, and youll begin to make payments on the principal and interest.
**Types Of House Building Loans**
There are several other loans available when it comes to home building, from ground-up building to a complete remodel of the entire house. Theres likely a loan out there thats right for you, whether youre starting from scratch with a land loan or completely renovating a home.
While well go over several types of financing for building your home, O1ne Mortgage Inc. offers end loans, which are the permanent financing after the home is built.
**Construction-Only Loan**
This type of loan is short-term and is usually issued for a year. Its meant to cover only the actual construction period. With so many variables like the builders cooperation, getting approvals from local municipalities, and more, these are considered higher-risk loans.
This means theyre harder to qualify for, and the interest rate will likely be higher than a traditional loan. In addition, if you decide to go this route, youll have to pay a second set of loan fees when you apply for a traditional mortgage.
**Construction-To-Permanent Loan**
Construction-to-permanent loans are a financing option that prospective custom home builders can apply for. Like construction-only, construction-to-permanent financing are one-time loans that fund construction and then convert into a permanent mortgage. During the construction phase, borrowers make interest-only payments.
These types of loans can be much more expensive than traditional mortgages, so if you decide to go in this direction, shop around, compare rates, and find the best deal before you pull the trigger. If youre an active-duty service member or veteran, you may even qualify for a VA construction loan from the Department of Veterans Affairs (VA).
**Renovation Loan**
Renovation loans, also known as FHA 203(k) loans, can be used for home renovation and are insured by the Federal Housing Administration (FHA). This allows borrowers to both purchase and renovate their new home while still making one monthly payment to cover both costs. Conventional loan borrowers may qualify for these loans through Fannie Mae (HomeStyle Renovation) and Freddie Mac (CHOICE Renovation).
O1ne Mortgage Inc. doesnt offer this type of loan. However, O1ne Mortgage does offer a cash-out refinance, which can be a different path to getting home renovations done. With a cash-out refinance, you take a portion of your equity and add what youve taken out onto your new mortgage principal.
Other options include a home equity loan or a home equity line of credit (HELOC). No matter what you want to change about your home, there are plenty of options to get the financing you need to start swinging that sledgehammer. O1ne Mortgage Inc. has Home Equity Loan options.
**Owner-Builder Loan**
Usually, when you build a home, theres a general contractor who essentially acts as head of the whole operation. They make sure the framing people, the tile people, the wood floor people, the painters, and so on all work in coordination to get your home completed (ideally on time and within your budget).
However, some prospective home builders wish to act as their own general contractor, and some banks offer owner-builder loans just for this purpose. These types of loans generally require the borrower to demonstrate through experience, education, and licensing that they have the needed expertise to oversee the homes construction.
**End Loan**
An end loan is a traditional mortgage loan that a home buyer or home builder (if youre building your own home) can apply for after the new home is constructed. Unlike the other construction loans previously discussed, these are offered by O1ne Mortgage Inc.
You can get an end loan if construction is complete on the home. One good aspect of an end loan is that the mortgage application for a newly constructed home is the same as it is for any other home. Less complicated is always appreciated when it comes to financing applications.
**Construction Loan Rates**
Construction loans usually have variable interest rates, meaning the rate will go up and down with the prime rate (or whatever other index theyre tied to) over the life of the loan. The specific introductory interest rate youre offered for a construction loan depends on factors like your credit score and financial history.
As mentioned, because they arent secured by a completed house, construction loans tend to have higher interest rates.
**Construction Loan Requirements**
Like with a regular mortgage, construction loan lenders have requirements that borrowers will need to meet in order to qualify for the loan.
– **Credit score:** Minimum credit score of 620 or higher is generally required.
– **Debt-to-income (DTI) ratio:** DTI ratio compares your recurring monthly debts to your gross monthly income.
– **Down payment:** Youll likely need a down payment of 20% when taking out a construction loan.
– **Choice of builder:** The lender will need to approve the builder of your new home and verify their licensing and insurance.
– **Construction plan:** The lender will also need to approve your construction plan. A signed contract, blueprints, a line-item budget, and a payment schedule are all examples of documentation your lender may want to see.
**How To Get A Construction Loan**
Wondering how the process of getting a construction loan works? Lets break it down step-by-step.
1. **Choose A Builder**
Before you begin to search for a lender, youll want to choose an experienced builder for your new home. Be sure to thoroughly vet any contractor youre considering working with. Read online reviews, ask about their credentials, and look at examples of previous builds theyve done to get an idea of if theyre the right choice to meet your needs.
2. **Gather Your Paperwork And Choose A Lender**
Just like with a traditional mortgage, youll want to shop around for a lender that will give you the most favorable terms for your construction loan. As youre comparing lenders, make sure you have all your paperwork ready to go, including the contract with your lender and detailed plans for your homes budget and construction.
3. **Start The Approval Process**
Getting your preapproval for a construction loan is an important step in ensuring that youll be able to afford the amount needed to build your dream home. Youll need to provide the same types of financial documents as youd need when applying for a traditional mortgage, including your tax returns, W-2s, and bank statements.
4. **Purchase Homeowners Insurance**
Even though you wont be living in your home while its being built, your lender will probably require you to have homeowners insurance with builders risk coverage as a condition of your loan approval.
**Construction Loan FAQs**
Here are some frequently asked questions when it comes to construction loans.
– **What if my home construction takes longer than planned?**
Any delays that exceed the loans terms can lead to penalties and/or higher interest rates. If these delays are related to unforeseen costs, it may be difficult to budget for these expenses, as the loan amount was set in advance.
– **Can I use any excess funds for home furnishings?**
Borrowers never actually touch the funds made available through construction loans because theyre paid directly to the builder. The contractor only receives payment for the work performed, and the borrower only pays interest on whats paid out. You do save money if construction costs come in below the original amount of the loan, but youll have to find some other source of funds for that flat screen.
– **Do construction loans cover the design phase of home construction?**
No. Prospective custom home builders have to self-finance the design phase of the home building contract. In addition, before you can take out a construction loan, youll need to produce a builders contract, construction timetable, designs, and a realistic budget. All this needs to be done even before beginning the loan application process.
**The Bottom Line: Construction Loans Can Make Your Dream A Reality**
Even if it doesnt look like your ideal home is available, the dream doesnt have to end. You can design, build, and furnish the exact home you want with a variety of ways to help get you there.
Whether its a construction loan, a renovation loan, or a home equity loan, borrowing money for your next home offers many choices. Figure out the best type of loan for your specific needs and shop around for the best price.
If youre looking to remodel your current home but dont think that a renovation loan is the best option, or you need permanent financing after finishing construction, the Home Loan Experts at O1ne Mortgage Inc. offer home equity loans that can help you achieve your goals. Start an application online today and explore your options.
**Keywords:** construction loans, custom home building, traditional mortgage, construction-to-permanent loan, renovation loan, home equity loan, O1ne Mortgage Inc., home financing, mortgage rates, construction loan requirements, home building loans.
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