When you’re thinking about doing some home construction, it may feel overwhelming because you may not have the funds to do it. Luckily, there are ways you can get around that, and the right lender will be able to assist you in the right direction.
What Is A Construction Home Loan & How Do You Apply For One?
Just like there are loans to purchase a new home, a loan for a wedding, a car loan, or any personal loan, there is also a construction home loan. If you need to make some repairs around your house you may easily apply for a loan for this.
You can go through your bank or another lender to take advantage of a home construction loan. First and foremost, to make things easier for you and the lender, you should sit down and think of all of the reconstruction you would like to do on your home, add all of the projects up and price the materials, etc. that will be needed during the process. Then, you will be able to know if you can qualify for the right amount. You don’t want to take out a loan of more than you need because it will take longer to pay back.
Once you’ve chosen a lender, you need to prepare the loan application. In addition to a detailed budget, the construction plan should also be in line with the local building codes. Depending on the size of the construction loan, you can have it approved within a month or two. Often, the lender will require you to provide a land deed, a payment schedule, and a signed construction contract.
A construction home loan is a unique type of home loan that requires a plan and preliminary work to be completed before the lender will approve your loan. Because you won’t have to make principal payments until the job is complete, you only need to make interest payments. This type of loan will have a fixed repayment schedule after the project is finished, so you can pay off the debt in smaller increments. This type of loan is a great option for those looking to build their own house from the ground up and don’t want to spend years paying off a bank or building society.
The ideal construction home loan allows you to make changes to the timeline and rates of the project without penalty. If you’re able to meet the deadlines, the loan should last for a longer period.
How To Qualify For Home Loans
Just like any other loan, it may be hard or easy to get approved for this type of loan. The lender you choose to go through will have to check your credit score, financial history, job information, etc. If you find out you don’t qualify, see if you can have a co-signer on the loan. A co-signer just means that the lender will also use their credit score to try and get you approved for the loan. The co-signer has to agree that if something ever happens and you miss a payment, then you will have to pay the amount back and make the payments. The longer you have been working at your current job, the better the chance you will have when you apply for the loan. If you have a solid relationship with your bank and checking out, that works out in your favor as well. What a lender looks at most is the credit history and your salary. The lender is just going to want to be sure you will be able to pay back the loan.
If you have a big project to do around the home, but you can’t come up with the total costs up front, you can easily fill out an application to see if you’re qualified for a home construction loan. The following projects are considered part of home construction:
- Basement Finishing & Remodeling
- Deck Construction
- Exterior Remodeling
- Indoor Remodeling
- Patio Construction
- Bathroom Renovation
- Kitchen Remodeling
- Sun Room Construction
If you see that a project you were hoping to do isn’t on this list, you can ask the lender if it will qualify for what you’re going to use the funds for. As long as it has something to do with constructing your home, the lender is usually very lenient.
Construction Home Loans vs. Mortgage Loan
A construction home loan is a shorter-term loan than a mortgage loan. Because it’s a riskier investment for lenders, construction loans have higher interest rates. However, there are many benefits to this type of loan.
Generally, a construction home loan is more difficult to qualify for than a conventional mortgage. It’s important to understand that a construction loan requires a more thorough assessment of your debts, income, and other financial information.
This is why it’s critical to provide the lender with the right documentation, such as tax returns, W-2s, and credit reports. As you likely already know, a good credit score is crucial to a construction home loan since it can help you save on interest costs and make it easier to pay off your project.