If you’re looking to increase the value of your home through improvements and upgrades, financing your project can be expensive and the best way to cover your costs is often through a construction loan. Construction loans vary depending on the nature of your project but making sure you get the right loan plays an important part in staying within your budget. So whether you’re looking for your first loan or you’re ready to finance your next project, asking the right questions can help you find the loan that’s best for you.
How Do Construction Loans Differ From Traditional Home Loans?
Rather than being based on the fair market value of the home and determined by the home’s condition compared to recent sales like traditional long-term home loans, construction loans are based on the estimated value of the home once the project is complete. The specifics of the loan can be determined by whether you are purchasing the property for the project or own the land where construction will take place.
Are There Different Types of Construction Loans?
Yes, there are. Because different clients and projects require different needs there are three kinds of construction loans available that provide different financing options:
- Construction-Only Loans
If you have a large budget to work with or own a home and are looking to build a new one, a construction only loan might be your best option. You won’t need a large down payment, but you will need to take out two separate loans, one specifically for the construction of the home and a mortgage loan to pay off the construction.
- Construction-to-Permanent Loans
With construction-to-permanent loans, the loan covers the cost of construction and once the project is finished is converted into a long-term mortgage. Unlike construction-only loans, construction-to-permanent loans are essentially two loans in one, meaning you can avoid excess fees and pay only one closing cost with steady, long-term payments.
- Renovation Construction Loans
These loans are best suited for individuals looking to purchase a fixer-upper or flip a home. In this case, your projected cost of doing renovations can be included in the mortgage along with the cost of purchasing the property.
What Do I Need to Get A Construction Loan?
Construction loans are seen by banks as a bigger risk because they offer flexible terms without the collateral of a traditional loan. As a result, the screening process for getting a construction loan is more stringent than a traditional one. In order to qualify you’ll need your credit score above 680, a low debt to income ratio, and can expect to pay up to a 20 percent down payment.
Looking for help finding the loan that’s right for your next project? Ed Currie has helped more than 5,000 families with their construction loans. So don’t let your dream home stay just a dream, get the expertise you need to get started and schedule an appointment today for your free consultation. Check us out on Facebook, Twitter, LinkedIn, Pinterest or Instagram for our latest tips and updates!