What Is a Construction Loan?
A construction loan is a type of short-term loan that may be used to pay the expenditures of construction from beginning to end. Construction loans may be used to cover the costs of purchasing land, creating designs, obtaining permits, and paying for labor and supplies. A construction loan can also be used to access contingency reserves (if your project turns out to be costlier than expected) or interest reserves (to those that don’t want to pay interest payments during construction).
How Do Construction Loan Works?
Potential property owners can use construction loans to borrow money to buy building supplies and pay for labor. This amount is usually used to acquire the land on which you will be building; but, if you already own the land, you may be able to use it as collateral for your financing. Construction loans are often given for a period of 12 to 18 months since they are meant to fund the building phase.
If you are qualified for a construction loan, you will not get all of the cash at once. In fact, the lender will pay your builder in several draws, or installments, as they complete different phases of building. Construction loans serve as a credit line in this sense. Draws are planned following the construction timetable, and your lender would most probably send an inspector to verify the progress of work before each payout.
In most situations, you will only be required to pay the interest on funds as they are taken. However, not on the entire loan amount. Lender to lender, you may also be able to convert your construction loan into a mortgage when the construction is finished.
Common Construction Loan Requirements
Construction loans are typically riskier for lenders, so getting qualified for one is obviously more difficult. Here’s what lenders look at.
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Your Credit Score
Lenders consider your credit score, just like they would for a typical mortgage. Most commercial and USDA construction loans require a credit score of 620. There is no necessary minimum for VA construction loans, however, lenders often want a credit score of a minimum of 620.
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Construction Plans And Requirements
Lenders will also need to know the details of what you want to construct. They may demand a design of the building as well as specifications, and the plans must be certified as fulfilling all of the essential construction codes in your region. A property appraiser will need to study those specifications to evaluate their worth, which will determine the amount of your loan.
REQUIRED DOCUMENTS
To obtain a mortgage, you will need to give numerous documents to the lender.
- A construction contract between you and the builder or contractor (if applicable).
- A copy of the contractor’s or builder’s license.
- A set of designs for the building you’re constructing.
- Detailed specifications on how the building will be built, such as the type of heating, plumbing, electricity, cafeteria, restrooms, and so on.
- Any quotes that are not part of the building contract, including swimming pools, sheds, greenery, and so on.
- The lender will request a land survey if you are acquiring land as part of the construction loan. You may have an acre or 5 acres of land. The lender will want to see what exactly they are financing on.
- A summary of the construction costs.
DIFFERENT TYPES OF HOME CONSTRUCTION LOANS
Lenders provide many types of construction loans.
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ONE TIME CLOSE
A one-time close construction loan, also renowned as a construction-to-permanent loan, naturally transforms the construction loan into a long-term mortgage when the property is built. You simply need to fill out a single application and conclude the loan once. This also indicates that you will only have to pay closing charges once. Usually, you’ll do interest-only payments during construction and then begin paying full capital and interest payments after the loan are converted to a mortgage.
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TWO TIME CLOSE
You get one loan for the construction stage and then another loan for the mortgage stage once the property is constructed with this sort of financing. The second loan is used to pay off the construction debt. This allows you to search around for the best rates and conditions for each loan. But you must apply for two loans then go through two closings, each with its own closing costs. You probably wouldn’t be allowed to lock in your mortgage rate until the property is almost completed. This form of financing is suitable if you are convinced that your financial condition will not change over the building process and are willing to apply for two loans.
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OWNER BUILDER
If you have building expertise, you may be qualified for an owner builder loan. However, you will need to function as a general contractor and control the whole procedure. This provides you with greater control over the process, but it also takes a substantial amount of time. These are often one-time close construction loans.
How to Select a Construction Loan Lender?
When it comes to picking a construction loan lender, there is a lot to think about, and it’s easy to become overwhelmed. So, it might be tempting to settle with the first lender you come across. You should not make this decision carelessly. By asking the following questions, you may ensure that you find a lender who meets your specific requirements:
- What kinds of construction loans do you provide?
- What are the current interest rates? Are they constant or changeable?
- Do you have any extra fees or closing costs?
- Can I utilize the equity I have in my property as a down payment?
- How are construction draws paid—as a percentage of completion or on a defined schedule?
FIND THE BEST LENDER FOR YOU
Hasanov Capital is a major provider of residential or commercial real estate finance solutions. Hasanov Capital provide appealing long-term financial solutions for stable rental portfolios, as well as credit lines for new purchases. They have a proven track record and a commitment to the sector that you won’t find elsewhere. Their loan officers are residents of the communities we serve. They eat at the same food shops as our clients, fill up at the same gas stations, and live our lives in the same way.
They have a strong interest in ensuring that each loan is closed as smoothly and effectively as possible. if you want to get financing for your real estate investment plan, call now!
