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  • Writer's pictureNancy Danyo Cuddihy, Premiere Realty Group

Understanding The Basics of Construction Loans to Build Your Dream Home



If you're planning to build your dream home, you might be aware that it's a huge investment that requires proper planning and execution. One of the essential steps for building a house is securing financing, and a construction loan could be the right choice for you. A construction loan is a short-term loan that provides funds to cover the cost of building a new home. In this article, we'll discuss how a construction loan works and the things you should consider before applying.




How Construction Loans Work

Unlike traditional home loans that are disbursed in a lump sum, construction loans are released in several stages known as draws. It's a short-term loan that usually lasts for a year, but it can be extended to two years if necessary. The borrower can borrow money according to the construction project's estimated cost, and the lender determines the amount that can be borrowed. The lender also monitors the construction process and disburses funds as the work progresses in several installments known as draws.


Types of Construction Loans

There are two types of construction loans: one-time close and two-time close. One-time close loans are known as a construction-to-permanent loan, and it combines the construction loan and the mortgage into one loan. It's a good option for those who don't want to go through the hassle of obtaining two different loans. Two-time close loans are also available, and they usually have a higher interest rate than one-time close loans. The first loan is used to cover the construction costs, and then the borrower obtains a permanent mortgage after the house is built.


Eligibility

To qualify for a construction loan, you'll need to have a good credit score and a stable source of income. Most lenders require a credit score above 680 and a debt-to-income ratio below 45%. The lender will also require you to provide proof of income, assets, and liabilities. You'll also need a detailed construction plan that includes all the necessary permits, construction timelines, and estimated construction costs.


Down Payment

The down payment on a construction loan is typically higher than a traditional mortgage, and most lenders require a down payment of at least 20% of the total cost of the project. However, some lenders may allow a lower down payment, but it will usually come with a higher interest rate.


In conclusion, a construction loan is an excellent option if you're planning to build your dream home. It provides funds to cover the cost of the construction project over time, and the lender releases funds as the project progresses. However, it's crucial to do your research on the different types of construction loans, eligibility requirements, and down payments before deciding to go ahead with the loan. With proper planning and execution, you can build your dream home and create a space that you'll love for years to come.



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