Guide to A Construction Mortgage
Everyone desires to find that perfect dream house that includes all the amenities of living comfortably, like a spacious bedroom, an open kitchen, a succulent garden, and the like. Lucky for homeowners who have found all their specifications in a house, but for some, only sometimes do they run into their entire desired checklist.
Keep hope when you exhaust all the listings searching for your dream house and still need help finding the perfect one. Consider constructing a new house instead with the inclusion of all your preferences in a home to make it perfect! But of course, the same with purchasing a newly built house; constructing one might be costly. Fortunately, a construction mortgage offers to fund buying land if you do not have one existing and finance the essential supplies and workforce needed to construct your new home. The home construction mortgage can either fund building the perfect home from square one or enhance your current property to make it perfect and desirable for the whole family.
Before you decide if the construction loan is best for you and your family, continue to read below to understand what it is all about and how you can obtain one.
What is a Construction Mortgage?
This kind of mortgage is regarded as specialty funding intended for a short period with more significant interest that offers to finance needed in constructing a house. The loan can be payable either at the close of the mortgage term or modified into a conventional loan.
Construction mortgage usually has a duration of one (1) year. Currently, the property must be constructed by issuing a certificate of tenure. Since this kind of loan has a high risk to creditors, they typically have stringent requirements and higher interest rates.
How Does A Construction Mortgage Work?
The potential homeowners can utilize the loan to pay the entire cost of constructing a new house, including the necessary supplies, permits, licensing, and labor. The procedures for the creditor’s approval are the same as applying and required documentation in the usual loan.
The moment it has been approved, the borrower can now begin getting the money in alignment with every stage of the construction. During the building process, an evaluator will oversee the development so the homeowner can carry on with the funds' accessibility.
A certificate of occupancy will be given to the homeowner once the construction of the property has been consummated. After which, the construction mortgage could be changed to a conventional loan. The homeowner can now repay the borrowed amount from the creditor in financing the home construction along with its associated interest costs.
With a construction mortgage, the rates are usually larger than those of a conventional one. In a traditional loan, the home will serve as collateral. In non-payment of the loan, the creditor can take hold of the property. But the creditor does not have that choice in the construction mortgage, so they consider this mortgage with higher risk.
Due to the short duration period of the construction loan, which relies on the project completion, the borrower must give the creditor a construction time frame, comprehensive plans, and a reasonable and accurate financial plan.
What Are The Different Kinds of Construction Mortgage?
Before considering this kind of mortgage, the potential homeowner must know the availability of various other mortgages in constructing a home from the beginning until completion or refurbishing the whole property.
1. The Construction-Only Mortgage
This kind of mortgage is for a short period, which is generally granted for one (1) year, and only includes the home's construction cost during the period it requires to develop. And the moment the property is built, the entire mortgage amount is usually payable. The homeowner can pay the due amount through cash settlement or obtaining a separate loan. In the end, this can eventually be more expensive if the homeowners require a different loan since they will end up paying for two (2) individual mortgage dealings and the two (2) arrangements of payments.
2. The Construction-To-Permanent Mortgage
Same with the construction-only mortgage, the construction-to-permanent mortgage is a one-time thing only. The homeowner borrows money to pay off the home construction cost, and as soon as the house is finished and the homeowner settles in the place, the mortgage will then be changed to a permanent loan. And once it modifies to construction-to-permanent, the mortgage converts to a conventional loan with the usual duration of 15 to 30 years term. The homeowner will then repay both the principal and the interest.
The advantage of this kind of mortgage is that the homeowner will only have the same set in paying the closing costs, thus decreasing the total costs. Likewise, it lets the homeowner transact with the initial phase of the needed documentation and provides the advantage of simply shifting to a loan once the home construction is complete.
3. The Renovation Mortgage
The renovation mortgage is a construction loan that funds the substantial shift in a home or for more extensive expansions to the homeowner's current property, like the construction of a swimming pool or additional rooms. FHA (Federal Housing Authority) protects this kind of mortgage, and traditional mortgage borrowers can also be eligible for this type of loan under Fannie Mar and Freddie Mac companies.
4. The Owner-Builder Mortgage
The owner-builder mortgage is both a construction-to-permanent and construction-only mortgage where the homeowner performs, at the same time, the home builder's capability. In constructing the property, an overall contractor sees the entire work process. But if the borrower is a professional constructor and wants to supervise their property, the owner-builder mortgage might be best for the construction. Creditors that usually permit this kind of mortgage are for those potential borrowers who are licensed constructors by profession.
5. The End Mortgage
The end mortgage is a conventional loan that the homeowner or professional constructor can obtain once the construction of the property has been completed. One advantage of this end mortgage is that applying for a loan on a newly built property remains the same for every other property.
What Are The Requirements For A Construction Mortgage?
1. Excellent Credit score
The majority of the creditors will entail at least 620 or higher credit score for the borrower to be eligible for the construction loan, while others require a much higher credit score of 700
2. Lower DTI (Debt-to-income) ratio
Creditors will scrutinize the borrower's debt-to-income ratio, which shows the proportion of the borrower’s earnings that takes off toward their liabilities every month. Creditors are very particular about the DTI to ensure the potential borrowers will have sufficient earnings to repay the mortgage.
3. Higher Down payment
With the construction mortgage, borrowers can expect a more significant down payment which the creditors usually require between 20 to 25 percent.
4. Builder Approval
Aside from assessing the financial standing of the home buyers, the creditors' approval is necessary when choosing a builder for the construction of the property. This is for the creditors to make sure that the builder is licensed and certified professional.
5. Approval of the Construction Plan
Apart from the builder's approval, the construction plan is also necessary for the approval of the creditors, such as a signed agreement, house plans or blueprint, and other documents needed to construct the property.
How Do You Obtain A Construction Mortgage?
The procedures for obtaining approval for the construction mortgage might look the same as traditional mortgages. However, being approved to begin the property construction might be more complicated. Below are the steps to guide you.
1. Search and Select a Licensed Builder
Before a creditor's hunt, homeowners must search for and select a licensed professional builder to construct their new property. All creditors need to recognize that the in-charge builder possesses the know-how and proficiency to complete the homeowners' property.
2. Collect All the Necessary Documents and Decide on Creditors
Like a conventional loan, homeowners may need to search for creditors that will provide them with the optimal condition for obtaining a construction mortgage. And as they begin to compare creditors, they must ensure that all the documents are available such as financial documentation, house plans and budget, and the like. Remember also to get character references for the licensed builder or essential evidence on their business permits or licenses.
3. Obtain preapproval
After finding a licensed builder and creditor, the homeowner can now begin the mortgage approval process. And obtaining preapproval is vital to ensure that the homeowner can pay for the costs required to construct the property. Documentations that must be provided are similar when applying for a conventional loan, such as pay stubs, financial bank statements, and tax returns.
4. Obtain Homeowners Insurance
Although the property is being built and the homeowner still needs to settle in, creditors oblige a prepayment homeowner's insurance plan containing builder's risk insurance. This is a means to safeguard the homeowner from whatever occurs throughout the property's construction.
Final Thoughts
Suppose you need help finding the perfect property that will best fit your needs and your family despite looking and searching for all the available houses for sale in the market. In that case, the construction loan might be the answer to building that dream home into a reality. You will have enough freedom to plan, project, construct and decorate the perfect home you desire with the diversity of the available funding to support the construction of your property.
Home construction might be overpowering. Good thing the construction mortgage can get rid of some of the worries. Ensure to seek the advice of a reputable company to help you explore your options in finding the best mortgage for constructing your dream house.