A dream home, the one you can call your own possession – is a desire every individual wants to fulfill during their lifetime. Some are able to achieve it sooner than later. Building a dream house incurs a lot of expense, hence a buyer resorts to a loan option to arrange for the required finances.
Home-Construction Loan: Basics Of An Ultimate Guide
Home construction loans are the preferred mode of loans to build a house or reconstruct an existing building. These loans are primarily short-term loans. This loan is taken against the mortgage of the property on which the house is being built and is either repaid after the construction is complete or is wrapped into a traditional home loan.
Types of Home-construction Loans
- Construction-to-Permanent Loan
While opting for this category of Home-Construction Loans, you need to provide a detailed chart of the building or house on the plot bought. More often than not, the borrower (You) would have already initiated the construction and approaches the lender or bank to complete the remaining project. These are considered a desirable home loan option, for they differ from the traditional loans by basing the loan amount on the completed project costs and not on the previous year’s sales comparison on the property.
Advantages of Construction-to-Permanent Loan:
- A single-close loan.
- The buyer can lock the interest on the loan after the construction has been completed.
- This loan is converted into permanent mortgage loan when the project is completed.
- Also known as two-in-one loan, for the borrower pays only one set of payments and thus the fees are reduced when compared to traditional loans.
2. Construction-Only Loan
Also known as two-time close construction loans, construction-only loan is classified into two categories or steps. In the first process, the borrower receives a short-term loan to complete the construction of the project. While in the second process, the borrower gets a completely different loan on the completed project in the form of a permanent mortgage loan. Usually, the closing costs on this type of loan is more than the construction-to-permanent loan.
Advantages of construction-only loan:
- It is more flexible when compared to the single-close loan.
- The interest rates on this type of loan are usually less than construction-to-permanent loans.
- The borrower can switch between lenders for the construction and the permanent mortgage loan.
3. Stand-Alone Construction Loans
In various occasions, the buyer opts for a smaller down payment due to financial constraints like building your dream home while making payments on your current home. A stand-alone loan works well in such a scenario.
To qualify for any of the above loans, the borrower must have a good credit score. Alongside there are other criteria that are taken into consideration by the lender.
- The developer must be listed under the pre-approved category of real-estate developers available with the bank.
- There must be a detailed prognosis and chart of the project that the borrower can present before the bank authorities.
- The loan amount must be pre-approved and analyzed by the concerned bank representative basis the calculations of the property premises.