Building a new home is an exciting endeavor, but with so many plates to spin and steps to take, the process can get overwhelming in a hurry. To keep stress at bay, here are the steps you need to take when securing a construction loan.
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- Find a plan. Choosing the plan that’s right for you is an important step in the construction loan process. Are you looking for a construction-only loan (a short-term loan that lasts for about a year and requires refinancing or a full payout at the end), or are you looking for a construction-to-permanent loan (an all-in-one plan that allows you to apply once to qualify for the construction loan, which will then transition to a permanent loan when construction is complete)? Talk with your lender about your options to decide what plan best fits your needs.
- Boost your credit. Having good credit is important to securing any loan, so now’s not the time to open a bunch of credit cards or close longstanding accounts (both of which will ding your credit). Pay down debts if you can, and ask about increasing your available credit. Your credit score will affect your loan interest rates, so it’s worth taking this step on the front end.
- Research and choose your builder. In order to qualify for your loan, you must work with a licensed general contractor known for doing good work in and around the community. Ask friends and coworkers for recommendations. Check out who’s building that new neighborhood you like. This step requires some homework on your part, but choosing a builder with a solid reputation will tip your project in the right direction. Once you’ve chosen your builder, you’ll need to get a plan in writing. That plan includes estimated cost and timeline for completion, including beginning and ending dates.
- Get prequalified. Prequalifying for your construction loan is a helpful step that will keep the process running smoothly down the road. If your credit looks good and you’ve partnered with a reputable builder, your bank should be able to tell you how much you qualify for.
- Apply for your construction loan. Unlike a regular home loan, construction loans are typically short-term loans used to cover the cost of building materials, labor, etc. that come along with construction. Because you have no equity in the home before it’s built, construction loans require a larger down payment. Twenty percent is the minimum, though many lenders require as much as 25 percent.
- Apply for your mortgage loan. As your home is built, you’ll need to transition from a construction loan to a mortgage loan, which will look a lot more like the 20-year-type mortgage you’re more likely familiar with. Some lenders offer a construction-to-permanent loan, which allows you to roll your construction loan into an eventual mortgage loan. Some lenders will make you refinance altogether. Depending on your qualifications, at Landmark constructions loans can transition to adjustable rate mortgages (ARM), which offer a lower initial interest rate and lower initial monthly payments at the start of your loan. After the initial fixed rate period ends, your interest rate can change annually.