If you’re shopping around for a new home and just can’t find the right one for you, you may need to consider building your dream home from the ground up.
Building your dream home can be challenging if you don’t know how to secure funding for your new construction. As opposed to paying out of pocket, there are new construction loans that individuals can receive to help build the home of their dreams.
What Is a Construction Loan?
A construction loan is a short-term loan that provides for the costs of building a new custom home. The specific type of financing is considered specialty financing that only covers the construction costs.
Once the building is completed, the individual would then need to apply for a mortgage to pay for the finalized home.
New construction loans provide borrowers the opportunity to build a new home, renovate one that is already built, and is usually a short-term loan, though some may be converted to a long-term option.
How Do New Construction Loans Work?
A new construction loan is a short-term loan that covers the costs of construction on a home. New home construction loans differ from traditional mortgages.
New construction loan requirements include a minimum down payment of 20%, the duration of a new construction loan is shorter than a mortgage, it comes with higher interest rates and are generally more stringent to get as the lender presumes greater risk.
Are New Construction Loans Hard to Get?
New construction loans are more difficult to get than other traditional loans and especially more challenging than a mortgage.
The reason is that with new construction loans, the lender is taking more risk since there is a lack of collateral like with a traditional mortgage.
5 Types of New Construction Loans
New construction loans can come in a variety of options for borrowers that can match the needs of the construction to the specifics of the loan.
The various tiers of a construction loan can range from ground-up building to complete remodels to permanent loans that start out for construction but become a mortgage.
Construction-Only Loans: A construction-only loan is one that is short-term, typically less than 12 months, and it’s meant to only pay for the construction.
Construction-to-Permanent Loans: A construction-to-permanent loan is a finance option that prospective home builders may apply for and these types of loans are considered one-time only but differ from construction-only loans.
A construction-to-permanent loan is designed to allow for construction to be covered and then converted into a permanent mortgage.
Renovation Loans: Renovation loans are designed for borrowers that want to renovate their new home at the same time as pay down their mortgage.
These types of loans are insured through the FDA.
The benefit for a renovation loan is that the borrower can do some cosmetic and other changes to the home under financing and only be obligated to pay one monthly cost to cover the loan and the mortgage as the two loans are combined into a single obligation.
Refinancing is another form of financing that allows for the borrower to refinance their debts, lowering the overall costs of the home mortgage.
Other financing devices include home-equity loans or home equity line of credit (HELOC) that allows the borrower to get cash based on the equity of their home.
Owner-Builder Loan: An owner-builder loan is a type of financing package that allows for the owner to act as the general contractor of the construction.
In traditional home building, a general contractor is hired and acts as the head of all construction, from building, framing, tile and flooring, plumbing, and more.
With an owner-builder loan, the home-owner assumes the role of the general contractor. These types of loans often come with stipulations that the borrower demonstrates specific knowledge or experience to oversee the construction needs of the home.
End Loan: An end loan is another name for a traditional mortgage. It is a type of loan that a builder or home owner can apply for after the home construction has been completed.
Financing A New Construction Loan
The new construction home loan process can vary depending on the type of financing and the amount requested. Typically financing new home construction can be challenging and most likely will require a lot of work on the borrower’s part to secure the financing.
In order to qualify a home loan for new construction, you’ll need to provide proof of detailed plans including floor plans, type of building material, builders and contractors, and more.
The better detailed and organized borrowers are, the greater chance they have securing new construction loans.
How Do You Finance A New Building?
Financing your loan will require you to jump through a number of hoops and to show that the construction is real, viable, and offers limited risk to your lender.
With financing your new building, you can look at traditional loans or cash, or pursue a new construction loan which may be harder to secure.
Differences Between Construction Loans and Traditional Mortgages
There are a couple of differences between traditional mortgages and the types of financing new home construction that is offered.
In general, the difference is that with construction loans, they require more down payment, more specifics about the loan needs, carries a higher interest rate to borrow, and the length of the loan is much shorter while mortgages are easier to secure and have a longer duration with a fixed interest rate.
What Type of Loan Is Best for Building a House?
There are three basic types of loans for new construction. Those are construction-only, construction-to-permanent, and renovation.
The best type of loan when looking to build a house is the construction-only with construction-to-permanent an option for people that are looking to secure a mortgage once the construction concludes.
What Projects Are Not Eligible for a Construction Loan?
In general, new construction loans are not going to be financed in situations where the borrower is trying to build the home and perform the construction. Typically lenders prefer a detailed construction plan that includes the use of a professional contractor rather than the borrower.
Is It Harder to Get a Loan to Build a House?
New home construction loans are harder to get than a traditional mortgage since there is no collateral that the lender can attach to in case you default. Since the loans are less secure, lenders are more hesitant to lend the funds and are more stringent in borrowers obligations.
How to Qualify for a New Construction Loan
It can be difficult to qualify for financing new home construction, especially for below prime credit ratings and without the average minimum down payment of 20%.
In some cases FHA, VA, and the U.S. Department of Agriculture will ease some of the requirements helping more qualify.
Down Payment on a New Construction Loan
If you’re looking to explore new construction financing, understand the down payment requirements before you apply.
How Much Is a Down Payment on a New Construction Loan?
For residential construction, the down payment on new construction loans is an average of 20% while commercial down payment requirements are 25%.
Determining the type of loan and loan amount doesn’t impact the total down payment percentage-wise, but the overall dollar amount may be lower when borrowing less.
When Is the Down Payment Due on a New Construction Loan?
A home loan for new construction has the same due date for the down payment as a traditional mortgage. To secure the loan, the down payment, along with closing costs, and any other fees are due at closing.
Process of Applying for a New Construction Loan
Financing new home construction can be challenging, so we make the process simple.
Using state-of-the-art technology, borrowers can apply online and get a quote in as little as 2-minutes.
In some cases, you’ll be asked to upload additional documents.
Once approved, borrowers can access all documents and e-sign for quicker transactions.
How to Get a Loan On a New Construction
Before you apply for new construction loans through traditional lenders, you need a detailed construction plan, a credit review, a minimum down payment, and great credit. In some cases there are additional documents that may be needed to complete your application.
At Best Lending Co, utilize a secure online application that can get you your loan funding in mere minutes. If you’re looking at financing new home construction and want easy to apply and quick funding, apply today at Best Landing Co.
