While the lender and the borrower are involved in a mortgage, the construction loan includes a third party – the builder.
As with all home loans, the interest rates depend on several factors. Lenders will qualify you based on creditworthiness, debt-to-income ratio, and the percentage to be funded. In general, the interest on a construction loan is higher than the mortgage interest.
In addition, many loans require that the lender make payments directly to the contractor. These payments are made in installments if the construction deadlines are met. After the construction is completed, the loans will either be converted into permanent mortgages or repaid in full.
There are a wide variety of home loans available. Below is a brief overview of the most common.
Loans for home remodeling
The amount you can finance to renovate your existing home depends on the appraisal of the property after the improvement. Your contractor and the renovation plans must be approved by your lender. The funds are forwarded directly to the contractor.
In general, a construction loan offers a longer repayment period and a lower interest rate than a home equity or personal loan.
Home remediation loan
Also known as the 203 (k) loan, the home improvement loan adds the cost of major renovations to the mortgage rather than being funded after completion. The loan is based on the value of the house after repairs and renovations. These loans are useful if you are buying a fixer upper but don’t have the money to make a renovation.
New construction loan
If you are building a home from scratch there are no improvements to secure the loan. So expect the lender to thoroughly review your finances, architectural plans, and your builder. The lender pays the home owner the home loan in installments, which is known as a tie. Each draw coincides with a key phase of the project, such as pouring the foundation, setting up the frame, and finishing work.
An inspection is usually required before each drawing is released to the builder and the amount of this payment is based on the work completed as noted on the inspection report.
Construction to permanent loans
This one-time loan finances the construction, then the borrowed amount is converted into a permanent mortgage after the building is completed. Also known as a home loan, the interest rate is locked in at the time of closing. Borrowers only make interest payments while the house is under construction. Since the interest rate on these loans can be high, you should shop around.
A home loan or two closure home loan is a short term loan that must be paid back after construction is complete. The interest rate is higher than a traditional loan and there are additional loan fees when applying for a traditional mortgage. Home loans are an option if you have large cash reserves or want to find a permanent lender while building.
The builder loan is intended for borrowers who want to act as contractors themselves. However, the borrower must demonstrate through experience and licensing that he has the expertise to monitor and manage the construction.
Murfey Company is a leader in residential and non-residential development in San Diego and Southern California, committed to excellence in helping its customers guide the construction process. Murfey Company also has extensive expertise in building loan negotiation and securing and can be a tremendous resource in financing projects. More information is available at www.murfeycompany.com.