What are Construction Loans?
Simply put, construction loans are loans that you can use to build your house.
With a conventional loan for an existing or new home, there is collateral – the house itself. When you build your home, you don’t have any collateral in case you can no longer pay your mortgage. That’s where construction loans come into play.
These are the most popular type of construction loans. Also called “all-in-one loans” or “one-time-close construction loans”, these wrap the construction loan and the mortgage on the completed project into a single loan. This type of construction loan allots you 12 months to build the home of your dreams.
The loan has one approval process, and one closing, simplifying the process and reducing the closing costs. Your construction loan is interest-only during the build and you will pay only on the money that has been disbursed. So your loan payments grow as progress is made and more money is released. When the home is completed, the total amount borrowed during the construction loan automatically converts to a permanent mortgage with a fixed rate for the life of the loan.
The Benefits of Construction Loans
There are some great reasons to consider a construction loan for your project. These include:
- The ability to finance your project: The land and the cost to construct can be financed. A minimum of 5% down is required for these types of construction loans.
- Control over the disbursements: With the Shamrock Financial construction-to-permanent loan, you will be in control of the disbursements to the builders. You can rest with peace of mind knowing you are getting what you are paying for.
- If you don’t use it, you don’t lose it: Once the building period has ended and the project is complete, the loan recasts and any funds that were not used are deducted from the principal. For example, if your construction loan was for $400,000 and the building project cost $350,000, then $50,000 would be deducted from the principal amount of the permanent mortgage.
- Personal satisfaction: Knowing that your home is built just as you want is difficult to put a price tag on, but it is worth it.
How to Get a Construction Loan
How do you get a construction loan, especially when you don’t have any appreciable asset to offer as collateral?
First, you need to have a plan. This means a comprehensive timetable of the work that needs to be done, how long it will take to complete each part, and how long in total it is expected to take. It also means providing a detailed budget for each of those parts. Your mortgage lender needs to know the whole story. Don’t forget to add in buffer in case there are delays to due to weather, supply issues, and other unforeseen situations.
Next, your mortgage lender will review your finances to see what kind of risk you represent. Make sure you have all necessary documents and paperwork to make the approval process move faster.
If you are approved, you will be put on a distribution schedule that follows each stage of your home’s construction. You make interest payments only during the construction. As you request funds for each stage, your lender will typically send a liaison to check on the progress of your home to make sure it is going according to plan.
When the home is completed and all contractors have been paid, you will get a certificate-of-occupancy document. Ask our loan officers for details about Shamrock Financial construction loans.
When you want to make building your dream home a reality, talk to us. With more than 27 years in the mortgage industry, we have the experience and knowledge to guide you towards the best financial product for your unique situation. Why wait any longer?