What are Construction Loans?

Construction loans are not something that everyone is familiar with especially if they are a first time home buyer, but it’s good to explore all lending options when you are planning to purchase property or land. Constructions loans are great option for those that live in an area where land is available for purchase or if they simply want to build something completely unique to what they want.

There are two types of constructions loans. The first type of construction loan is called a construction-to-permanent loan. It is used to pay for construction, and then once the home is built, it becomes a mortgage.

The second type of construction loan is a stand-alone construction loan. There is one loan for the construction of the home and then once the home is built, you get a mortgage to pay off the construction loan.

The Finer Details

Once the home is built, the construction loan will become a permanent mortgage just like a mortgage on any other home that was purchased outright. This type of loan can be a fixed or adjustable rate at 15 or 30 years. You’ll want to make sure you are choosing the right terms for this loan just as if you were considering purchasing a home off the market.

While the home is being built, you are only responsible for paying for the interest on the balance of the construction loan. This type of loan has a variable interest rate and that means it can change throughout the construction of the home.

The reason a stand-alone construction loan can be a good idea is if you can’t make a large down payment. For example, if you are selling your current home, but want to build another. You might have a surplus of cash once you sell your home so you can use that to pay the construction loan once the home is built.

You should consider that if you do choose a stand-alone construction loan there will be two closing costs for each loan. You also are not able to set the rate on this type of loan so you could end up paying more than you expected in interest.

How To Qualify

A construction loan is not as easy to apply for as a standard mortgage because there is nothing to use as collateral. You will have to go through a rigorous process with the lender when it comes to the details of the home in order to qualify for a construction loan.

You will also need to be accountable for extra costs that come up along the way as the home is being built. Because there is no way to know the exact expected costs, you want to be sure you have some funds saved up to cover the those expenses that pop up along the way.

Another important decision you’ll have to consider is who is going to build your home. They are going to be the person responsible for building your home so you’ll want to pick the right person for the job so that you aren’t over budget and the home meets your expectations.

Contact Us Today!

Choosing to construct a home is a major decision and there’s plenty of details that you’ll want to learn before moving forward. We want to make sure you have all the tools necessary to make the right choices. Please reach out to KC Investor Funding to get your questions answered today!

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