Intended to cover the cost of constructing or rehabbing a house, Construction Loans are higher interest rate, shorter term (usually for a period of one year) loans paid to a contractor, rather than the borrower, and as construction targets are completed. Upon completion of construction, the borrower has the option to either refinance the construction loan into a permanent mortgage or obtain a new loan to pay off the construction loan (sometimes called the “end loan”).
Construction Loans
What is a Construction Loan?
Who is eligible?
Unlike a traditional mortgage, when you borrow money for a Construction Loan, there may not be collateral available – after all, the house may not be built yet. So, there are a few extra considerations. First, a 20% to 30% down payment is traditionally required for new construction. Also, your debt-to-income ratio (DTI) should be no more than 45% of your income and you should have a credit score of 680 or higher. Additionally, the lender may want to know if you’ll pay the balance in cash or refinance upon completion.
Features
They’re flexible
When it comes to loan terms and guidelines, Construction Loans are much more flexible than traditional loans, and are often designed around the specific needs or plans for your project.
Lower interest
With a Construction Loan, you don’t pay on the principal (as the loan won’t be paid out in full until the project is complete.) Rather, during that time, you pay a lower, interest-only rate.
The home of your dreams
While a Construction Loan has a few more hoops to jump through, the ultimate outcome is that you are able to fund the home of your dreams, exactly as you and your contractor plan it.
Who is eligible?
Unlike a traditional mortgage, when you borrow money for a Construction Loan, there may not be collateral available – after all, the house may not be built yet. So, there are a few extra considerations. First, a 20% to 30% down payment is traditionally required for new construction. Also, your debt-to-income ratio (DTI) should be no more than 45% of your income and you should have a credit score of 680 or higher. Additionally, the lender may want to know if you’ll pay the balance in cash or refinance upon completion.
What other loan types are available?
When it comes to loans, you have many more options than you think. Find out about some here:
