For most Americans, buying a house involves taking out a mortgage. But what if you’re planning to build a home? Building a new house may be an excellent way to secure a home that is perfectly tailored to your preferences, but it’s a pricey process. If you lack the funds to pay out of pocket, learning how to get a new construction loan may offer a solution.
How to Get a New Construction Loan
When you’re purchasing a home with a mortgage, the property is normally used to secure the loan. Under these terms, if you fail to make your payments, the lender can take possession of the property and sell it to help recoup their investment. That’s why it’s virtually impossible to secure a standard mortgage when you’re planning to build a home. At the start of the process, there’s no asset with a value comparable to the amount of the loan. The lender’s level of risk is much higher, and few are willing to take that chance. That doesn’t mean that you can’t build your dream home. It simply means that you’ll need a different type of funding. New construction loans are an option worth exploring, and there are a few different possibilities:
As its name implies, a construction-only loan is designed to provide the monies needed to build a new home. According to CreditKarma, these loans are short-term loans. Borrowers will generally need to pay closing costs at the time of the loan and begin repaying their lender 6 to 24 months after the loan is issued, but the terms can vary. What if you aren’t prepared to repay the loan when it comes due? Once the new house is completed, many new homeowners find that getting a standard mortgage to pay off their construction loan is a possibility. It’s an effective strategy, but it does mean that you’ll have to go through another loan approval process and pay another round of closing costs.
Also known as single-close construction loans, construction-to-permanent loans eliminate the need for multiple rounds of loans and multiple sets of closing costs. As NerdWallet explains, these loans automatically transform from construction loans into traditional home loans after the construction is completed. You’ll only need to go to closing once, you’ll only pay one set of closing costs, and you’ll be able to lock in your interest rate for your home loan earlier.
Making a New Construction Loan Work
With a new construction loan, the lender doesn’t simply hand over the cash. Instead, they create a draw fund or escrow account. The funds are held there and paid to the contractor in installments as specific milestones are reached. Investopedia offers some helpful advice for making a new construction loan work:
- Have a detailed plan. To improve your odds of securing a new construction loan, be prepared to present yourself as a good risk. Make sure that your finances and credit are in good shape. Be ready to offer any necessary documentation. Also, be able to supply your lender with a reasonable budget, realistic timetable, and detailed construction plan.
- Be ready to make a down payment. While mortgages are available with little or no down payment, construction loans are different. Lenders generally require a down payment of at least 20 percent for these loans.
- Prep for land matters. If you’re building a house, you’ll need suitable land. Decide whether you’ll pay for the land upfront or include it in your construction loan. Rolling it into your construction loan requires less money out of pocket, but it will increase the amount that you’ll need to borrow and the size of the required down payment.
- Choose a qualified builder. Lenders generally insist that any project that they’re financing be helmed by a licensed contractor with a good reputation.
Would you like to know more about how to get a new construction loan? Reach out to the loan experts at PrimeLending of Denver. We don’t pitch cookie-cutter solutions. Instead, we listen carefully to your housing goals and offer personalized guidance to help you reach for them. To learn more about our services, contact us today.