The sense of pride that you feel when you are constructing the home of dream is unmatched. It’s a journey of turning your vison of a perfect home into reality. Each step and hurdle that you face takes you one step closer to owning your own place. Now, when it comes to financing the construction of your home, you might be perplexed and worried about securing the proper channels for the funding. No need to worry. You can simply apply for construction loans. These loans are solely meant to be used for the construction of your dream home and offer you the perfect financial solution.
Let’s take a closer look at what are construction loans, how you can apply for them and the type of properties that we serve through these loans. You will also learn about the other important aspects about construction loan.
What Exactly are Construction Loans?
Construction loans are unique loan options that are short term that are designed to fund your construction projects such as a house or a property. While typical home mortgages come with a repayment period of 30 years, construction loans tend to have shorter repayment time such as one year. The Construction loans often come with adjustable rates, higher interest rates and are short term.
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How Do Construction Loan Tend to Work?
Construction loans can be used in a variety of ways to fund your house construction. Unlike a mortgage which can be used to fund several things, construction loans are typically used for:
- Getting required permits
- Land purchase
- Building Material and associated costs
- Labor Wages
- Contingency reserves for additional costs
The repayment of the construction loans tends to work in one of two ways. It will either be converted into mortgage upon the completion of the house or you will get a separate mortgage which will be used to pay off the construction loan.
Eligibility Criteria of Construction Loans:
When it comes to securing the right construction loans, you will need to present certain documents, credit history and sufficient funds for a down payment. The exact requirements for the construction loans will vary from lender to lender. But you will be typically asked to have the following:
- Credit Score: You will need to have a good FICO score of 680 or higher but at Dream Home Mortgage; you can secure construction loans with even a 580-credit score.
- Debt-to-Income Ratio: When it comes to applying for construction loans, your lender will check your DTI ratio. For construction loans, the standard DTI ratio is around 45% and higher.
- Down Payment: It is always a good idea to deposit a larger down payment as it removes the need for additional costs of Private Mortgage Insurance (PMI). You can apply for construction loans even with only 3.5% down payment.
- Required Documents: To secure the best terms for construction loans, you will need to have additional documents such as W-2s, tax returns, bank statements and pay stubs. Additionally, you might be asked to submit your construct for the house and the detailed plans for the construction of the house.
- Construction Plan: Most lenders will thoroughly check your construction plans, financial situation and builder. This is due to the fact that, construction loans can be quite risky for the lender. According to the set standard, the approval of your loan will depend on the builder you choose. So, you need to thoroughly vet the builder, check his credentials and previous work experience before giving him the job.
Step by Step Guide to Applying for Construction Loan:
Now, that you have all the documents on hand, you can apply for construction loan. The approval period of construction loans can typically take anywhere from a few weeks to months as it depends on various factors. On an average, the construction loans approval can take 30 to 60 days.
Here is a step-by-step guide for successful construction loans approval:
1. Determine Your Construction Budget:
One of the first steps that you should consider before apply for construction loans is to draw a budget. Your budget plan should include the cost of the construction materials, cost of labor, permits and any other expenses that are related to the house’s construction. A thoroughly detailed budget gives you a clear idea how much you need to borrow. You also need to add the down payment in this budget as well.
2. Prepare a Detailed Construction Plan for Your House:
Once you known you budget, the next step is to chart a construction plan for the house. Lenders will typically ask to see a detailed construction plan before approving your loan. The plan should include the timeline, detailed architectural design, list of materials required and the information of the contractors involved. It is important that the design outlines cost estimates for each phase of your house’s construction.
3. Get A Pre-Approval:
Now that you have a detailed construction plan along with the determined budget, you can apply for construction loan pre-approval. By applying for a timely approval, you can save time as it streamlines the construction plan. We will typically look at your credit score, income history and financial situation for the pre-approval phase. The pre-approval will also help give you a clear picture of how much you can borrow.
4. Submit Your Loan Application:
After the pre-approval, you need to gather all the above mentioned documents along with the budget plan and construction details, and apply for the construction loan application. You might be asked to submit additional documents at this phase. As the loan application process can take up to serval weeks, you need to thoroughly check your documents before applying to avoid any further delays.
5. Begin Construction Upon Loan Approval:
Once your construction loans are approved, you can begin the construction! The funds for the house’s construction will be directly disburse to your contractor’s account based on the progress of the project. During the construction, each phase will be monitored and the funds for the next phase will be released only when the previous one is completed. This process ensures that the construction project is on track and that your house is in safe hands.
Types of Properties Our Construction Loan Serve:
You are now quite up to speed about construction loans and all the important aspects regarding them. Construction Loan can be used to construct a number of properties. Here are some of the properties that you can use to construct from the funding you receive through Construction loans:
- 1 to 4 family home constructions.
- Multi-family home construction.
- Retail shops or complex construction.
- Office construction.
- Warehouse construction.
- Hotel Construction.
- Mobile Park.
- Farm Land.
Make the Right Choice & Choose Dream Home Mortgage Construction Loans!
Construction Loan offers a wide array of benefits when it comes to building your dream house. You can easily apply for these and get the funding required to start the construction. You can also secure a variety of real estate loans from owner-occupied commercial loans to developmental financing with amazing competitive rates. At Dream Home Mortgage, we understand that each construction project has unique needs. Therefore, we cater to the ever-changing requirements of the government and West Texas. Under the capable leadership of Mr. Hussein Panjwani, we have helped thousands of families across the 50-states of America secure funding for their dream home. With over 25 plus years of experience under our belt, we can help you get your desired funding through construction loan as well. So, what are you waiting for? Book our free 30-minute consultation session today!
Thank you for sharing the informative article.