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About Construction Mortgage
When you are looking for a property there are two options you have, either you can buy a ready-to-move home, or buy land and build your own home.
Whether you build your home or move into a home that is already constructed, you will need finance.
When it comes to move-in-ready homes, you can apply for a mortgage. However, if you require finance to build one, you might need a construction mortgage loan.
In this post, we will understand about construction mortgage or a construction loan in detail.
What Is A Construction Mortgage Or A Construction Loan?
Building a new home from the ground up involves a lot of costs. A construction loan is a loan acquired to build a new home from the ground up.
Just like a mortgage, a construction mortgage funds the process of construction expense estimated by the contractor or the developer.
The loan is disbursed in intervals during the construction of the property as per the progress.
The construction loans are usually interest-only during the construction period and are due once the construction is completed.
However, some construction mortgages could be converted to a conventional mortgage once the construction is complete.
How Does A Construction Loan Work And How Do You Get A Construction Loan?
A true construction loan is where a consumer goes to a lender or a bank and gets money just to construct the home which they are building.
These loans are not typically permanent, therefore once the home is completed, the certificate of occupancy is issued, at that point need to refinance and pay off the construction loan and end up with a collateral-based mortgage.
Just like a standard mortgage loan, the consumer is required to make a down payment of twenty percent of the estimated cost drawn by the developer and the rest could be financed by the lender.
To get a construction a lender would require the blueprints of the property that you are building from the developer with the estimated expense of the entire project.
Along with these, the lender would also require a timeline of the progress so that they can disburse money in those intervals to the contractor or the developer.
Once the lender has approved the loan, they will start disbarment of the loan in a timely interval according to the progress.
In most construction mortgages, the borrower pays only the interest amount during the construction phase of the project.
Depending upon the type of the construction loan, the borrower might have to pay off the loan on completion of the project or could get it converted to a standard mortgage.
What Are The Types Of Construction Mortgage Loans?
I - Construction-only Loan:
As the name suggests, this is the loan provided for the sole purpose of building the new property.
In this type of construction mortgage loan, the borrower needs to make interest-only payments for the amounts drawn in the intervals, and make the entire lump sum payment of the loan once the project is completed (Typically 12 months) either by cash or by acquiring a standard mortgage.
The construction-only loan could end up being expensive as the borrower might have to pay two sets of closing costs one for getting the construction loan and the other for getting a mortgage once the construction is completed to pay off the construction loan.
In a situation where you have some personal hardship, you may not be able to either get a mortgage to pay off the construction loan and might not be able to move into the new home.
II - Construction-to-permanent Loan:
This is a construction loan that rolls into a mortgage after the construction is complete. You only have to apply for this loan one time at the very beginning.
After the construction is complete and all the inspections are done, the lender will roll your construction loan into a standard mortgage.
All you need to do is sign a couple of documents and the lender will convert the construction mortgage into a standard mortgage.
You do not have to spend on the closing cost more than once if you get a construction-to-permanent loan.
III - Owner-builder Construction Loan:
This is a loan where the homeowner is acting as a general contractor on their own home. They could perform the work on the home or sub everything out just like a general contractor.
Most lenders won’t lend owner-builders as they perceive the projects are too risky. However, some lenders help to get owner-builder construction loans.
Since there is no general contractor to carry the liability insurance, a personal liability policy must be added to the homeowner’s insurance of $300,000 during the construction period.
The lender would require a letter of experience from the owner builder to explain the kind of experience the owner builder has to build that home.
IV - End Loan:
An end loan is simply the loan that is converted by the lender from a construction loan to a standard mortgage at the end of the completion of the project in a construction-to-permanent loan.
This is not a separate type of loan just a part of the construction-to-permanent loan.
Conclusion
Though a construction mortgage could be one of the best options available for potential homeowners, there are still a lot of costs incurred in a construction loan. Just building the house is not going to make it habitable.
You might need to spend on appliances, furniture, landscaping, and many other expenses even after the construction is complete.
Hence, we would suggest comparing the option of ready to move homes before you make any decision.
