Virtually all construction loans are short-term and designed to last six to 12 months maximum with most programs designed as interest only payments during the construction term. At the end of the construction project, your loan terms can be re-negotiated or you may be required to pay the remaining balance in full.
Your lender will consider the location of the site, the design of the building and construction costs before approving any type of financing. If you own the property, the amount of the loan may also differ. Of course, your credit history, income and typical mortgage application data also play a huge role in determining the cost of your construction loan.
A good place to start could be finding how much you can borrow before you even apply for the loan. You can go to a few local banks and meet with the customer service agents. During your meeting, let them know you want to find out about the pre-qualification process. Once you have an idea of the amount you qualify for, you are that much closer to landing the right loan.
What will the lending institution ask me for?
You will be asked to produce documents to prove your employment status. This can include contact information of your current employer, hire date information, title, and income (monthly or annual). If you are self-employed, you will need accounts payable and receivable statements and tax returns.
They may also ask for your financial institution information including name and location, copies of your statements and account numbers. If you own property, especially the lot where the construction will be performed, you will need to forward purchase agreements, deeds, and/or title ownership.
Because this is a construction loan, you will also need to show designs, schematics and blueprints, a list of the materials being used and a breakdown of the over-all costs. If you run into any problems or have questions and concerns, you can contact a loan officer for assistance. They are able to help you with paperwork and ultimately, want your business so use them as a resource if needed.
How long will I have to repay the loan?
Construction loans are very different from traditional mortgages. They are designed for short-term use, not to be dragged out for several years. For this reason, the interest rates are generally much lower on construction loans. This is also one of the reasons why they are more difficult to be approved. During the application process, the repayment period is given. Under normal circumstances, you may be obligated to pay the interest of the loan while the construction is still going on; once complete, the loan is due.
Most people choose to convert the construction loan in an attempt to repay over time. If you can take out a mortgage to pay the balance of the construction loan, this might be an option worth considering. A first mortgage carries a lower interest rate so you may be able to save a little money. Another option to look into is for people who are building their first home. You may be able to convert a construction loan into a permanent loan to include your mortgage.
What is the difference between a home equity loan and a construction loan?
The primary difference between home equity loans and construction loans is home equity loans are granted to current homeowners who have built equity in their existing homes; construction loans are more for a project surrounding a home that has not been built yet. If you choose a home-equity loan to cover the cost of a home improvement project, your rate will be fixed.
Construction loans have variable and fixed interest rates, depending on the type of collateral, if any that is put up to secure the loan. While payments are completed in installments, just like home equity loans, construction loans surround the timeframe required to complete the project.
Typically, a home equity loan is considered an additional lien on the property; this means that if the loan goes into default, the homeowner may suffer the consequences, like possible foreclosure. The lender may also exercise their right to sell the equity in the home to another financial institution to make up for their loss.
Both types of loans can serve your purpose, but if you are not looking to add any additional debt to your current home, you may want to work with the construction loan. The repayment process may be a little tougher than that of a home-equity loan, but you will be able to satisfy your debt faster.
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