Construction Loan
The process of finding the ideal house can be both enjoyable and challenging. With numerous aspects to consider, such as the style, size, and location of the house, people often struggle to know where to begin.
Many buyers discover that certain houses fulfill most of their requirements, some meet a few, and others meet none at all. Rarely does a single house meet all the criteria, which means compromises must be made. Certain features that were once considered essential may need to be reevaluated as preferences rather than deal-breakers.
Feeling hesitant to give up any of your desires and needs? Have no fear, because if your dream home is unavailable or doesn't even exist, you have the option of building a brand new house that fits all your criteria. However, in order to finance this construction, you must have knowledge about construction loans.
What exactly is a construction loan?
It is a short-term loan that specifically covers the costs of building a custom home. This type of loan differs from a mortgage and falls under specialty financing. Once the home is completed, the potential occupant must apply for a mortgage to cover the cost of the finished house. Although we do not provide financing for construction loans, we can assist you in converting them into a permanent mortgage when the time comes.
Construction Loans vs Traditional Mortgages
As previously mentioned, construction loans are short-term in nature, typically lasting no more than a year. On the other hand, traditional mortgages are long-term loans with durations ranging from 15 to 30 years. With a mortgage, the borrower receives the full loan amount in one lump sum. Payments begin immediately upon loan closure and include both principal and interest.
For construction loans, you typically make interest-only payments while the construction of the house is in progress. These loans also tend to have higher interest rates than typical home loans, as they are considered riskier for lenders.
Different Categories of Home Construction Loans
Short-Term Construction Loan
A short-term construction loan typically lasts for one year and is specifically designed to cover the actual construction phase. However, we do not offer this type of loan due to their higher-risk nature. Factors such as the builder's cooperation and obtaining approvals from local authorities make these loans more challenging to qualify for.
Construction-to-Permanent Loan
Prospective custom home builders can consider construction-to-permanent loans as a financing option. Similar to construction-only loans, construction-to-permanent financing provides one-time funding for construction and then converts into a permanent mortgage.
Renovation Loan
Federal Housing Administration (FHA)-insured renovation loans, known as FHA 203(k) loans, provide financing for home renovation. This unique loan option allows borrowers to purchase a new home while simultaneously renovating it, with both costs consolidated into a single monthly payment.
Owner-Builder Loan
When constructing a home, it is customary to hire a general contractor responsible for overseeing the entire process. This individual ensures that various tradespeople, such as framers, tilers, wood floor installers, and painters, work harmoniously to complete your home in a timely manner and within budget
End Loan
An end loan is a conventional mortgage loan that a home buyer or, when constructing their own home, a home builder can apply for upon completion of the new property. Rocket Mortgage provides end loans as an option separate from the previously mentioned construction loans.
How do construction loans operate?
- You can utilize a construction loan to cover all expenses related to building a home, including land, labor, materials, and permits. The approval process for a construction loan is similar to that of a traditional mortgage, requiring you to submit an application and relevant documentation to your lender.
- Once approved, you can begin accessing the funds in stages throughout the construction process. An appraiser or inspector will periodically evaluate the progress of the build to ensure compliance with the loan terms, allowing the borrower to remain on track.