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How to Unlock Your Dream House With a Home Construction Loan

May 23, 2022
Written by Brandon Crysler
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Are you overwhelmed by bidding wars, overpriced homes, and the housing market frenzy? Building your dream home might be possible thanks to a home construction loan. From how they work to the construction loan requirements, we’ve rounded up everything you need to know about construction financing.

You might consider getting a loan to make those dreams become a reality, but how do you go about this type of home loan? If you want to learn more information on how to unlock your dream house with a home construction loan, we’ve got the answers to all your burning questions. Let’s get building.

What is a Home Construction Loan?

While different companies may use different names to call it, a construction loan is essentially a loan used to build something. This loan allows you to build what you want, and it differs from a traditional mortgage.

A construction loan is a short-term loan in which you use the money to build or renovate a house. After the home is built properly, a certificate of occupancy is issued. You may use this loan to buy land, pay contractors, and build a home.

A construction-only loan is one where you only use the loan to finish building a house. This differs from a traditional mortgage where the loan is used to finance a home.

How Do Construction Loans Work?

With a traditional home loan, your home is used as collateral. This means if you fail to make payments, your lender can take back your home to recoup some money. This reduces the risk for lenders giving buyers a lower interest rate.

With a construction loan, you may see higher interest rates and even variable interest rates that go up or down. This is because lenders are taking on more risk. You may start a construction project, default on your loan, and the lender is left short.

A construction loan is also on a shorter timetable than a traditional mortgage. You’ll need to provide the bank with detailed plans, a realistic budget, as well as a timetable for completion. Once your loan is approved, money is paid in a draw or directly to contractors to pay for the construction.

With a construction loan, progress payments are often made. This means contractors are paid as the home progresses. This is typically done when major projects are completed such as a foundation getting poured or the roof getting installed.

What Can You Afford?

When you apply for a construction loan, there are a number of factors taken into account. First, a lender will look at the income you have coming in. Next, they’ll look at your existing expenses and debts. They also pull your credit history, much like with a traditional mortgage.

From there, lenders go over different options and loan terms. Some buyers are looking to roll a construction loan right into a mortgage loan. For others, they want to use a loan to build the home and then have a separate mortgage after the home is built.

With a construction loan, you’ll often only pay interest during the construction period. Interest rates and the amount you qualify for will vary depending on the type of home you’re building.

You’ll also need to factor in the cost of land, the cost of construction, and what you can afford. Take a look at your budget before applying and come up with a number that works for you. From there, a lender will work to get you a comfortable payment that still allows you to build the house you’re envisioning.

The Different Types of Construction Loans

There are several different types of construction loans. From construction-to-permanent loans to construction-only loans, we’ve rounded up a little bit about each type of loan. Let’s jump in and see which construction loan is right for you.

Construction-to-Permanent Loan

Consider the construction-to-permanent loan, in which home buyers borrow money to build a house, move in, and then convert their construction loan to a permanent mortgage. The advantage of a construction-to-permanent loan is that you only have to pay closing costs once. There’s no need to apply for a mortgage after the home is built.

When the construction-to-permanent phase is over around 12 months, for example, the lender creates a traditional mortgage. This phase lasts up to 15 or 30 years, during which you make payments that cover both interest and the principal. Your mortgage is then a traditional mortgage with installment payments.

As of now, you may choose between a fixed-rate or adjustable-rate mortgage, and the FHA construction-to-permanent loan, which can be a good option for some borrowers. The VA construction loan is available to eligible veterans.

This option is great for people looking to roll the construction and mortgage phase into one. You apply once, get the construction loan, and then it’s automatically turned into a mortgage. You don’t have to worry about applying again or setting up your mortgage payments.

Construction-Only Loans

A construction-only loan gives you the money necessary to finish building your home. You’re responsible for paying the loan in full once it reaches maturity. This is often in a year, but it could be longer depending on the project. After this, you will need to secure a permeant mortgage.

The money is paid to the contractors during the construction phase. You’ll pay interest on the money taken out or drawn. Inspections may also be done to see how the construction is progressing and to issue your payments.

Construction-only loans may cost more if you still need a permanent mortgage. You’re essentially completing two loan transactions with additional fees for each. Closing fees can add up when you multiply them by two.

Renovation Loans

Home renovation loans are perfect for when you want to renovate an existing home. You don’t have to build a home and you can fix the one you already own. Depending on the amount of money you’re looking to spend, the project costs will vary.

A cash-out refinance option lets you take out a new mortgage. Your loan is higher than the current one and the overage is given to you in a lump sum. You can then use this lump sum to pay contractors and renovate your home.

If you’re already in a home and you love the location but not the home itself, this is a great option. You get to stay in the area and the home you already own but you get to fix what’s been bothering you.

Building or Renovating a Home vs. Buying New Construction

If you’re contemplating buying a fixer-upper, building an entirely new home, or buying new construction that’s already built, there are a number of things to consider. First, when you buy a new construction home that’s already built, there could be some drawbacks.

First, you don’t get to choose your own land, location, and where the house is built. Second, you didn’t get to design the home to suit you and your lifestyle. A new construction home may have already been completed.

Maybe you won’t love the layout, or you would have chosen different finishes. When you build your own home or you renovate an existing home, you’re in the driver’s seat.

You get to pick out as much detail as you’d like. You can work with your own contractors, professional designers, and more to fully customize your dream home. The possibilities are almost endless.

Don’t Let a Lack of Funds Stop You From Building Your Dream Home in Your Dream Location

When you renovate a home or buy an existing home, you can’t move it from its location. The home sits on the land it came on. If you’re looking to choose your own land, street, and location, this is your chance.

When you build your own home with a construction loan, you get to choose where it is. Not only do you get to choose the location, but you also get to turn it into the home of your dreams.

Choose your dream location to start building. Choose by the school district, proximity to work, the amount of land, and more. Whatever matters most about the location is possible when you get to choose the land you build on.

There’s no need to hunt around for the perfect home. You can choose your favorite area, find a lot or a home that needs work and start building your own. It could take you months or even years to find a home on the market that may never exist. 

With a Renovation Loan, You Can Finally Build the House You’ve Always Wanted

If you’re currently living in a house you don’t love, you likely daydream about the changes you’d like to make. Whether it’s a bad layout in the kitchen or the flooring that doesn’t match, now is the time to make the changes.

With a construction or renovation loan, you can finally make your house the home you’ve always wanted. From the floor plan to the size and the fixtures, you get to make the changes you’ve always wanted to.

A renovation loan, you can add on more square footage, remove walls, add bedrooms, change the exterior, and more. Make the changes you’ve wanted to make for years. A renovation loan lets you stay in your home while making it your own.

There’s no need to uproot your family, move your belongings, or change your routine. You get to keep your family in your home while making it the home of your dreams. A construction or renovation loan also lets you keep cash in your pocket for emergencies.

Boost the Value of Your Home With a Home Construction Loan

If you buy vacant land or a fixer-upper, the home you add will increase the lot in value. As you build your home, you’re also building equity. Your new build adds instant value.

The new dream house you’ve created will increase your net worth as well. Your land and home are worth more. The deeper discount you get on the vacant land or the tear-down, the more value you’ll gain.

If you’re looking to build or tear down an existing home in an expensive market, this is a great way to save money. New construction homes that are already built are in low supply. In the current housing market, bidding wars and competition for homes are the new normal.

Buying a tear-down or vacant land means you get to live in the area you want. Instead of searching for the perfect home, you get to build it in the spot you choose. You choose the size, the layout, the floor plan, and every detail in between.

Apply for Your Home Construction Loan Today

If you’ve been searching for your dream home for months with no luck, building your own could be the answer you’ve been looking for. It’s almost impossible to find the perfect home. A home construction loan lets you build it instead.

A home construction loan lets you finally build the home you’ve been dreaming of. If you’re ready to apply for a home construction loan today, fill out the contact form here. We have a variety of loan options to help you and your family build the home of your dreams. 

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