Do you want to build your own home? If you are thinking about building your own home, you might have already noticed that there are a few challenges you’ll run into, particularly when it comes to financing. Constructing your own home from the ground up gives you the freedom to customize the features and the design of the home, but you’ll need to find the right financing options to make it happen. Construction loans are used by both home buyers and home builders, and are different from other mortgages in a few key ways.
Construction home loans are short and require the borrower to repay the loan once construction is finished. The money for the loan is typically given to the builder to use as needed throughout the construction of the home. Usually, you will only make interest payments during the construction phase. The loan is due once the home is complete.
When considering obtaining a construction loan, you will need to determine the cost of the project and how much the lender is willing to give you. You must also work with a qualified general contractor. Lenders look for contractors with solid reputations for building quality homes. Throughout the loan verification process, the documentation you will need to produce includes inspection reports and builder validation.
It’s much easier to get a construction loan if you are building on property that you own. If you don’t own the land, you will be required to make a large down payment, usually 20% to 30% of the loan amount. Another requirement of construction loans is that the value of the home must be estimated by a licensed home appraiser. The appraiser will derive the value of your future home based on similar homes in the area.
Although most construction loans offered today are adjustable rate, there are a variety of construction loans to choose from that include a variety of different features. A popular feature that many borrowers choose is a loan that can be transferred into a standard long term mortgage. This can help the borrower avoid having to pay closing costs twice when it’s time to get their mortgage.
If you choose this option, the loan will convert to a regular mortgage once the certificate of occupancy is issued for your home. Many lenders are using these loans in conjunction with 30 year mortgages, making them more popular than ever. However, you can still shop for a different loan afterwards since interest rates on these loans tend to be in the higher range.