Buying an empty lot to build your own home? This alternative to purchasing a pre-built home appeals to many buyers in that it lets them start fresh in a brand new house.
But to build a home from scratch requires a lot of work and a special loan known as a construction loan. Also known as a self-build loan, construction loans are short term loans used to cover the costs of building your own home.
There Are Two Main Types Of Construction Loans
There are two main types of construction loans offered, construction-to-permanent, and stand-alone.
Construction-to-permanent means that once the home is built, the construction loan is converted into a permanent conventional mortgage.
A standalone construction loan is two separate loans and is best used when you have sold your last home and have some money to put towards building. You will have one loan for the home’s construction, and another to pay off the debt from the construction loan. Remember that for this instance, you will pay two sets of closing fees.
Construction Loans Are Harder To Qualify For
Construction loans are a bit harder to qualify for than a traditional loan, as they are short term and high-interest. This is because the lender does not yet have the home as collateral and face a higher risk of losing on their investment.
As such, for these loans to be approved by a lender you must have a certified builder with a good reputation on hand. You will also have to get pre-approved, provide the lender with completed construction documents, and have enough money saved up in order to put down a significant amount of money upfront.
Don’t forget that good credit is essential!
You Must Stick To A Construction Timeline
Construction loans last for about a year. In that time, the home must be built and a certificate of occupancy issued, if one is required by the city/municipality or county within which the new home is located. These loans are doled out by the lender over the course of the construction as each stage progresses.
Find A Reputable, Experienced Agent
Find a reputable agent that has experience in construction before you begin the process of getting a construction loan. Agents like the ones here at Merchant of Homes will help guide you through the process of not only finding and purchasing land but providing you with the resources you need to find the best lender for you.