What are different types of construction loans?
When a borrower is looking to build a house of their own or possibly renovate one already built they usually will be required to purchase a construction loan. This person can apply for a loan to help complete a household project they have been working on, or even borrower a good amount of cash to start building the home of their dreams. Typically this type of mortgage loan is only intended to only be lent for a short time during the construction period on the property. Many people do not know but there are actually multiple types of construction loans one can look into.
A one-time close loan is probably the most popular type of construction loan. This type of mortgage is when the lending institution allows a certain amount of money to be lent out, and to be paid back in full during the time the home is being constructed. For example, if the borrower estimates that the home should be completed in two years, they will generally then have to make 24 monthly payments for the loan to be paid by the time the project is complete. These loans usually are very short term with a fixed interest rate. The borrower may end up having to pay additional penalty fees if the home is not completed on time according to the loans agreement. After the property is built the lender can then convert this loan into a traditional long term home loan.
A note modification loan is another common type of construction mortgage. Like a one-time close loan this type of mortgage can also become a traditional home mortgage after the home is complete. This type of mortgage typically will start out with a low monthly payment and slowly increase as time goes by. Once the home is completely built the borrower will be able to choose from a fixed rate or variable mortgage. With a variable rate it is important to remember that your payment may increase a significant amount over time. Another type is called a two-time close loan. This loan has a set payment schedule that will pay off the cost of construction when the house is finished. Generally, after the home is completed the borrower can refinance into a new loan with a better rate. Usually this is only applied to expensive building projects.
Many times you will find that lenders will offer a specific type of construction loan based off the what the borrower is pursuing. Alot of people will apply for a manufactured home loan which is typically short term as well because the homes are much less expensive to build. But keep in mind that this loan will also carry other costs that include the moving from a factory to the specific spot the owner wants to build. There are actually many other loans that are specialized for manufactured or log homes as well.
What is a Construction Loan?
Some people out there are very creative and do not want to purchase a home that is already built. These people want a customized home that fits their family needs and want to design it themselves. So because of this lenders will offer what is called a home construction mortgage to give the borrower the needed funds in order to build the home of their dreams.
Typically these loans are a very short term mortgage, and are due back in full once the home is completely built. Usually in order to pay off this loan the homeowner will have to take out a new regular mortgage for the home. Their new mortgage will most likely be much less than if they had purchased a similar home that was already built.
The home construction loans guidelines and requirements are not standardized in the same way as a regular mortgage. These loans are commonly referred to as “story loans” because the mortgage lender will usually want the borrower to explain to them the background story of the planned construction. Typically the lender will also want to know if the borrower already owns the land on which they want to place the home, because for the loans purposes this may be used as equity.
The fact that home construction loans are meant to only be a short term mortgage, the interest rate will not play an important role as it would with a regular loan. This is why it is worth it for the borrower to accept a fairly high interest rate on the loan, especially if the borrower has plans to immediately replace the mortgage with a regular loan once the construction is complete. By accepting the higher interest rate the borrower may be able to obtain a lower interest on their new mortgage.
Borrowers who choose to build there own home often take the place of a project manager or general contractor to complete the construction. The borrower can even help build their home if they choose to do so, but they are not required to. If you are skilled in the construction industry, helping build the home may save a lot of extra cash and time to complete the project. Borrowers often save about 15 to 20% when they build there own home, instead of purchasing a pre-built property which tends to be much more.
But construction loans will not automatically be given to anyone who requests one. They must prove to their lender that they have full intentions of paying back the loan and are motivated to begin building. Various other factors must be evaluated as well like any other loan such as credit rating, income, budget, etc.
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