People who decide to build a home rather than purchase an existing one don’t qualify for a mortgage in the traditional sense. They will need to apply for a construction loan instead. These are typically short-term loans with a higher interest rate than the standard mortgage. The proceeds from a construction loan cover the cost of building a new home or rehabbing one that needs extensive work.
A construction loan differs from a mortgage in that the loan amount is equal to the value of the housing project once complete. When you apply for a mortgage, the lender considers the condition of the home and the recent sales price of similar homes to come up with a fair market value. The mortgage then covers at least the fair market value amount. If you’re considering having a home built, we outline the three different types of construction loans below.
Construction Loan Types
A construction to permanent loan is ideal if you already have a construction timeline and plans in place. Your lender pays the builder as that company completes the work. When the builder completes the work, the lender converts it to a conventional mortgage shortly before you take ownership of the home. The benefit of a construction to permanent loan is that it allows you to lock in your interest rate for the remainder of the loan.
With a construction only loan, you pay the balance in full once your new home is complete. This can work well if you have large cash reserves or expect to receive enough proceeds from the sale of your old home to cover building costs. You will need to search for a second lender if you need to finance any of the remaining building costs once your home is complete.
A renovation construction loan is for people buying a house that needs significant improvements. The cost of completing the renovations ties in with the mortgage as the final purchase price for the home. Some government programs can help with the cost of renovating an old home as well.
Alternative Capital Source is here for you when you’re ready to pursue a construction loan. Please contact us today.