A Guide To Self Build Construction Loans

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If you have a plot of land, a building permit, and plans, you have all you need to build a home. Now all that is required is the funding. A traditional mortgage isn’t the right choice if you are constructing a house since mortgages are designed for an existing property.

Self-build construction loans are different from traditional mortgages because they are given incrementally during each construction phase.

At the end of the construction project, you will have a home and pay the rest of the loan through a mortgage. 

What Is A Construction Loan?

Self-build construction loans differ from traditional mortgages because for the latter; the lender gives the borrower all of the money upfront so they can pay for the property. 

With this type of loan, the lender gives the borrower money in portions as the construction process progresses. This can be done either in the form of an advance or in arrears. 

There are different types of construction loans: construction-to-permanent loans, construction-only loans, and owner-builder loans. 

Construction to Permanent Loan

The loan finances the construction of a home and turns into a permanent loan when it is finished. It is best for people who want to save money on closing costs and are satisfied with mortgage financing. 

Construction Only Loans

The loan is given only for the home’s construction and must be paid off when the house is built. If there is any leftover, it must be refinanced into a mortgage, but the permanent mortgage is taken separately. Those who can pay off the building loan with the sale of another home may choose this option. 

Owner-Builder Loan

These loans are given to the builder’s owner and are only granted to people with proven building experience. 

How To Get A Construction Loan?

The most important factor for construction loan approval is a good credit score. At the very minimum, lenders want to see a score of 680, but some may require a minimum of 720. In addition, the lenders want to know that you will have enough money to pay off the loan and that you have a low debt-to-income ratio. 

You will most likely be asked to give a minimum down payment of at least 20%. Some will want to see 30% or more.

 In addition, applicants must show full permits for every construction phase and information about the builder. 

Tips For Calculating Your Construction Loan 

To calculate your total construction loan, you will need to start with two numbers. 

The first number is the construction costs. The second number is the appraisal of the potential value of the home. The lender will then loan you a percentage of the appraised value. To get this number, multiply the appraised value by.XX%. You can use a construction loan calculator here. You can arrive at your minimum down payment because it is the value of your loan minus construction costs. 

To calculate your monthly premiums, take the annual interest rate and divide it by 12 for the monthly rate. Then, multiply the total borrowed by the monthly interest rate.  

When Do You Start Paying Mortgage On A New Build?

Full repayment of the loan, including the principal and interest, begins when you settle in the home. During the building phase, you will pay only interest on the loan. If you have a total loan of $500,000 and have used only $200,000, you pay interest only on the $200,000. 

During the building phase, your payments will gradually increase. This is because you will be paying interest on a larger amount of money as the lender discusses milestone payments until you will be paying both the principal and interest when the house is built. 

Is It Possible To Get A Construction Loan Without Money Down? 

This may be possible if you have enough money to cover the purchase price. In addition, you may be able to get a grant or other types of funding, so none of it will have to come out of your pocket. Finally, if the opportunity is compelling and you have a track record,  you may find investors who will pay the initial amount. 

Sometimes this can happen due to certain circumstances. If you are supervising building a home for someone else and in the end, if they don’t want it or if you can buy the finished home from them, then you have managed to build a house with no money down to the lender. 

Construction Loans Can Make Your Dream A Reality 

Whether you are committed to building your dream home or want to construct an investment property, a self-build construction loan is the best way to fund your project. It is worthwhile to work with someone who has experience with these types of loans and building a property. Don’t let a plot of land sit empty, but make plans and secure the funding to build your dream home today. 

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