Getting the home of your dreams will often involve endless open house searches, with some likely to fit in with your taste while others do not simply come close to what you like. If you have recently gone through this and cannot find what you are searching for, building your own home will be your next alternative. This will, however, require you to get the right financing. Below, we discuss how a construction loan can help you build your perfect home.
Understanding Construction Financing
A construction loan is a type of financing that caters to the cost of building a home. After the funds are exhausted and the construction is complete, this loan is converted into a mortgage loan. Approval processes resemble other traditional loans, with borrowers required to prove their creditworthiness and ability to repay the loan. Lenders may also request the cost estimates of the home to help evaluate the detailed plans for the property construction.
After a successful application, the funds are paid out in a series of disbursements referred to as draws. Once your builder completes every stage of the work, they request for draws, which can only be paid after an inspector assesses the progress of the work.
Types of Construction Funding
There are various forms of construction loans available to borrowers, each having specific requirements and uses. Examples include:
Owner-Builder Construction Loan
Owner-builder financing is designed for individuals who want to be their own contractors rather than relying on other builders to manage their projects. This will allow you to reduce your costs but will often be suited to borrowers with experience in construction.
A construction-only loan advances you funding for only the cost of construction. After your home is complete, you will be required to get a mortgage plan to refinance this loan, providing you with the flexibility to shop for a mortgage lender that fits in with your needs. It, however, comes with extra documentation due to the multiple application and closing processes involved.
The construction-to-permanent loan converts to a permanent mortgage after the construction of your home is complete and will not require you to go through the approval process again during its conversion. Since it comes as a single transaction, you only have to go through one closing process, making it cheaper when paying for closing costs on one loan.
If you want to buy a fixer-upper property, a renovation loan is what you need. It will provide enough financing for purchasing the house and paying for the renovations. Homeowners who also want to fix homes they currently live in can also get access to this funding.
If you need a construction loan to fund your next property, consider calling Commercial One Group today for financing geared to make your dream project a reality.