Last year, construction crews raised about 50,000 new homes. And, with that number only increasing each year, it’s a great time to get to work!
Many people who choose to build new homes, however, require a construction loan to do so. If you’re planning to take out one of these types of loans, there are a few things you need to know.
Let’s check out seven key things to keep in mind when looking into construction loan options.
1. New Construction Loans Can Be Short-Term
Whether you’re an individual looking to build a new house with loan services or you’re a small business that operates construction projects, you can use new construction loans.
These types of loans, unlike loans such as home loans or student loans, are generally short-term. You can take them out specifically for building a new home, and don’t have to worry about lengthy repayment terms.
The one downside to these types of construction loans is that they often have high-interest rates associated with them. Since the loans are so high risk, banks cover a lot of interest to protect themselves.
Even if you do get lumped with a whopping interest rate, you can rest easy knowing you can refinance the loan into a mortgage. Or, you can just pay it off using another standard bank loan.
2. You’ll Likely Have to Pay a Large Downpayment
Before you race out to take out a construction loan, be prepared to make a relatively hefty downpayment. In general, construction loans require about 20-25 percent downpayments.
The 20 or 25 percent is calculated not only on the construction itself but also on the mortgage. That can make the payment come out to several hundred thousand dollars!
Now, while this price might seem crazy, don’t panic. You can always refinance your construction loan into your mortgage when the project is over, helping cut down on some of the costs.
3. Construction Loans Involve a Lengthy Application
Another factor to keep in mind when applying for construction loans is that you usually have to go through a lengthy application process.
On the application, you’ll have to include a ton of different details. These details cover:
- A project timeline
- Builder details
- The amount of funding needed
- Floor plans
- Architectural drawings
- Material costs
- Labor costs
You may be asked for other details too. Be prepared to take your time on your application and make sure you have as much detail about your project as possible.
4. Construction Loans Come With Lots of Paperwork
As you might have guessed from the fact that construction loans involve a lengthy application process, they also involve a lot of paperwork. You’ll need to provide tons of different documentation for your project.
First, plan on providing as much detailed information about the project as possible. Second, you’ll have to make sure you have good credit and can show proof of income.
Lastly, you’ll need to fill out an application. These applications usually take several hours to complete, so make sure you have enough time set aside before getting started.
5. You’ll Need to Provide Housing Plans for Approval
So, you’ve got all your financial details in order and you have a great credit score. You’re ready to apply for a construction loan, right?
Not so fast! You’ll need a few other pieces of information if you want to get your loan approved.
In order to qualify for your loan, you’ll need to provide specific details and cost estimates about your project. You may also be required to produce construction contracts.
Even if you’ve been pre-approved for your loan, it’s important to know these documents will likely be requested in order to get final approval. Make sure to have them in order to get the loan you need.
6. You Have to Get an Appraisal First
It might sound crazy to get a home appraised if it hasn’t been built yet. However, the reality is that there are professionals out there who are experts in doing this!
When you ask for a construction loan, you’ll generally have to get an appraisal done on your project. This means that specialized construction appraisers will check out your project to get an idea of what the actual costs are.
This gives them an idea about the total value of your future home or building. They’ll be able to make a decision about how much money to lend you based on the project appraisal.
7. You Can Apply in-Person or Online
Traditionally, you had to walk into a bank to get a construction loan. Today, however, it’s fairly easy to find a construction loan online.
Some websites will allow you the chance to compare different lenders. This can be a great way to get an idea of how much funding you’ll receive and what the terms will be before signing anything.
On the other hand, sometimes the easiest way to get a good loan rate is to simply visit local banks in person. When you do, you can often get specialized industry information from experienced professionals.
Find the Perfect Construction Loan
Choosing a construction loan can be tough, but with these seven things in mind, you’re on the fast track to getting a good one. Just follow these seven tips and you’ll be sure to get a great construction loan.
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