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What’s A Home Construction Loan and How Do You Qualify?

by pps-DUEditor

Constructing your own new house is exciting, but it’s not cheap. A construction loan, aka building loan, is a type of loan that you can use to finance the cost of building a house. Unlike most other mortgages, these loans do not pay off your existing home’s mortgage at all – they simply fund the cost of building or renovating your new home.

While you do have access to the money after the construction has been completed, this type of mortgage has some unique features that may make it more appealing than a traditional fixed-rate mortgage. But, how does it work? And how can you get one of these loans if you are building your own home? Read on.

There are many reasons that banks and mortgage lenders are leery of construction loans. A major issue here is that you’re entrusting hundreds of thousands of dollars in property value to a builder. If things go wrong, things can turn out rather badly. So there’s a list of qualification criteria to be met.

You Need to Work with A Qualified Builder

If you are acting as your own general contractor, you may have an especially hard time finding an institution to finance your project. If you are part of an owner/builder situation, we encourage you to work with a lender who understands this unique lending environment.

Detailed Specifications Need to Be Given to The Lender

If you are looking into getting a construction loan, then your lender will almost certainly want detailed specifications (sometimes called the “blue book”). These home plans usually include everything from ceiling heights to the type of home insulation to be used.

An Appraiser Will Have to Estimate the Home Value

Before you start building, an appraiser needs to give you an estimate of the cost and the potential selling price of your home when it’s complete, based on comparable houses in your area. The appraised value of your home provides the basis for the construction loan.

A Large Down Payment Will Be Required

Qualifying for a construction loan can be hard – especially if you don’t have the 20% – 25% down payment that most lenders need to loan money for a construction project. This protects the bank or lender in case of any unforeseen issues with the property and ensures that you are really committed to building and paying for your new home.

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