2017 Guide: How to Find Top Home Construction Loans
When you can’t find the home you want, you may consider building your own home or even take on a home construction project to build a set of homes for others to live in as a business for yourself.
Unless you have a ton of cash ready to put on your home construction project, you’re going to need to take advantage of construction lending opportunities for home construction.
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But how do you get new home construction loans or even commercial construction loans?
This guide aims to teach you about the basics of getting a construction mortgage. Learn some tips for getting a construction loan, including when to apply for construction loans and where to find and get these construction loans.
You’ll also get some insight on what people want to know about getting construction home loans and commercial construction loans. Let’s explore how to get a construction loan.
What People Want to Know about Finding Top Home Construction Loans
People searching for information on home construction loans have several questions, and they often resort to asking these questions online, whether in a forum, via social media, or as a comment on articles.
It’s understandable why: construction loans aren’t easy to get. If you think about it, you’re asking a lender to give you a construction mortgage to build a home when no one knows how the home will do in the market. Here are a few concerns about getting a construction loan:
- How do I get a home construction loan?
- How long does it take to get a home construction loan?
- Where can I find information on commercial construction loans?
- Does the government offer any construction loans for homes or commercial construction loans?
- What are some tips for getting a construction loan?
- What are the advantages and disadvantages of new home construction loans?
A home construction loan is a loan that you generally use to help with the cost of building a home. Construction home loans are also usually short-term loans, such as for one year. That means that once you complete the home, you will need another loan, or end loan, to pay for your home construction loan.
When you’re trying to use home construction loans to build a home, you are basically looking to secure a construction mortgage with either the intent to use that money to build a new home or for a home being built by a builder.
Construction loans can actually be easier to obtain than a mortgage on a home that has been owned by other homeowners. This is due to the fact that the new home will be up to current construction codes and will less likely need repairs in the long run.
If you are looking to obtain a loan on an older home, some banks will take into account that if you default on that home that it may take a long period of time for the bank to sell back the older home.
On the other hand, with a new home, the bank has a better chance at reselling the new home if you were to default on your construction mortgage. Additionally, a new home has a higher chance of retaining its value compared to an older home that may need to be updated or repaired.
When obtaining new home construction loans, you and the bank come to an agreement with the builder of your new home to build the home by a set date, which is usually within a year.
Usually, the builder holds a lien on the property during this timeframe—you are expected to pay a monthly payment toward your upcoming mortgage even though you are not living in the new home.
The amount you usually have to pay while your new home is being built is only to cover the interest rate each month.
After the home is completed, the builder will release the lien on the construction project and give it back to the bank.
During this process, the builder is essentially notifying the bank that the home is ready for someone to move in, and the builder is taking the money that is owed to them and transferring ownership to the bank.
That means that your construction mortgage is then converted to a regular home mortgage since the construction period is complete and the bank is now the lienholder of the property until you finish paying for the home.
What Is a Construction to Permanent Loan?
A construction to permanent loan combines both a home construction loan and a mortgage into one loan. When you opt for a construction to permanent loan, you pay closing costs just once, but you can have your financing bundled into one fixed 30-year mortgage, for example.
However, it may be more difficult to get complete funding with this type of loan for your home because the bank will have to take on greater risks in comparison to the value of the home.
Advantages and Disadvantages of Home Construction Loans
Construction lending has its advantages and disadvantages that you should consider. It’s a big step and purchase to make when you are considering construction lending, whether it’s commercial construction loans or construction home loans. Here are a few advantages and disadvantages to consider before taking on any construction lending opportunity:
Some advantages of home construction loans include the following:
You’ll get to buy a new home that no one else has ever lived in.
As long as you pay your construction mortgage and your regular mortgage to the end, you will be in a new home that is up-to-date and will require little to no maintenance when you first buy the home since the home will be built to code, and no one will be in there to damage it.
In contrast, buying older homes could come with surprise repair bills that can hurt you financially in the long run. This could include moldy walls, gas leaks, and inferior insulation.
You can customize your home.
Building a new home using construction home loans can give you the opportunity to make changes to the interior and exterior of your home if the option is available.
That means you can talk to the builder to make changes to the home to meet your needs and preferences. For example, if you initially started building a home based on a four-bedroom model, you can ask the builder to make an adjustment by changing the fourth bedroom into an office.
You can start paying for your home during the construction project.
During the building process, you will only need to pay the interest rate on the mortgage payment you have agreed to with your lender. However, you can enhance your construction lending offer by making arrangements to pay toward the principal of the home so that you can build equity. This allows you to already begin the process of quickly paying off your loan during the construction process.
The government offers new home construction loans, home construction loans and commercial construction loans.
The UDSA and FHA both offer home construction loans that you can take advantage of, whether you want to live in a rural area or in the city. The USDA focuses on rural communities while FHA borrowers can get homes in both rural and urban dwellings. These loans are also more lenient for borrowers with fair or poor credit.
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You can expect your construction project to come to fruition.
Prior to the housing bubble of 2008, many homeowners were left with incomplete homes due to the builder running out of cash and taking massive income hits. This often was due to the fact that many of the builders’ clients ended up being unable to pay the construction mortgage payments. However, after the housing bubble of 2008, guidelines have tightened to avoid unfinished projects, and getting a house with a new builder now will more than likely mean that you can expect the project to be completed.
Some disadvantages of home construction loans include the following:
The loan is short-term.
Construction loans are not designed to take decades to pay off like a regular home loan. Instead, you’re expected to pay off the loan within a shorter timeframe, which can be as short as a year.
It’s harder to get home construction loans now than in the past.
Since the housing bubble of 2008, getting any type of mortgage loan has been more difficult than prior years due to tighter lending restrictions. Typically, as a new home buyer, you will need to put down a significant amount of money for your down payment, which can be 20 percent or more depending on your credit score.
There are limited construction lending options.
Since the housing bubble of 2008, there have not been that many options available for commercial construction loans or new home construction loans. Many banks and lending companies have reduced lending offers due experience with too many defaults.
You can’t move into the house until it’s fully finished.
Construction lending practices often require you to refrain from moving in your home until construction is complete. This will force you to either stay at your current rental location or other home where you might be making payments until the project is finished. That means you may have two mortgages to pay if the project gets delayed.
You may just not like the home.
Even though the home is being built based on your preferences, there is still a possibility that the home construction project may not turn out how you envisioned it. Some home builders only have pictures or a 3-D computer model to show you how the home will look once complete. If it ends up turning out different, you may be stuck with a home you don’t like for a long time.
You can end up paying more in the long run due to delays.
Weather can cause major delays in a home construction project, and builders cannot help acts of nature. That means if something goes wrong and pushes back the deadline, you run the risk of paying a higher monthly payment. For example, if your one-year construction project gets delayed an additional six months, then the lender may require you to pay the full mortgage payment while your home is being built instead of the lower interest-only mortgage.
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7 Tips to Finding Top Home Construction Loans
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If you want to know how to get a construction loan, there are a few tips you should keep in mind:
1. Look up the home builder’s history and how long they have been around.
If a home builder survived the 2008 crisis, they more than likely will be a strong candidate to build your home as they were able to manage their money properly and finish the homes they were contracted to build, even if some of their clients defaulted on their construction loans.
However, beware of builders that disguise their company as a new company. Some builders will simply rename their company due to legal or financial issues.
2. Get a real estate lawyer to look over your construction loan.
A real estate lawyer can help to ensure that the terms and conditions are clear and are to your liking.
By doing so, you can further ensure that you will not have any financial surprises at the end or be left on the hook for unwanted expenses that could happen during the building process. Additionally, the lawyer can also determine that the contract you sign is worth it or not.
3. Shop around and don’t fall for a fancy sign on the side of the highway.
When selecting a new home construction project, try and find a home that is already being built. This will further show that the builder is financially stable enough to build a home without any contract on the location.
In addition, this will shorten the time needed for you to wait to move in so you can avoid paying extra living expenses elsewhere.
4. When looking for home construction loans, research the area you plan to build your home.
Double-check the rating of the local schools and whether the area is equipped for high-speed Internet services. This will further assist you in the long run if you plan to sell the home.
5. Ask what will happen if the builder is late making the home due to the deadline.
There is a high chance that if the home construction project extends beyond the short-term agreement that you will end up paying both your regular monthly mortgage and the construction mortgage. Therefore, make sure you understand all terms and conditions of your loan.
6. Shop around for the best interest rate on the home construction loans.
Don’t take the first offer that comes your way.
Try and see what other lenders can offer you. Your goal is to get the lowest interest rate as possible with the most favorable payment terms and construction outcome.
7. Do not shop at one new home builder location. If you want to learn how to get a construction loan, shop around from different lenders. Go to a variety of lenders to ensure you are making the right choice.
Final Thoughts: Best Construction Loans
Getting a construction loan may not be as difficult as you think. It requires time and research to get the home you want.
Prior to signing any new construction loan deal, ensure that you have the appropriate lawyer to look over the paper work and help you understand the terms and conditions of your contract.
By following these steps, you’ll learn how to get a construction loan to build the home of your preference.
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