Mortgage

How Dwelling Loans Work

Do you need a home loan?

If you want to build a new house from scratch, you probably need a building loan.

This is a short-term loan that can be used to finance land, supplies, and labor – in short, all of the costs associated with building a house.

There are different types of construction loans. Some have to be repaid after the house is built, others can be converted into a mortgage that you will repay over time.

The right type of construction loan for you depends on your budget, construction schedule, and how you plan to use the house after construction.

Check your eligibility for home purchase (July 7, 2020).

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Home loan explained

If you plan to build your dream home instead of buying an existing home, you will need a home loan unless you have the money. With home loans, you can finance the materials and labor to build a house from scratch – unlike a traditional mortgage loan that only applies to finished houses.

A home loan is a short-term loan – usually 12 to 18 months – that provides funds for the materials and labor required to build the residence.

The money from this loan can also be used to buy the property on which the house will be built (or you can get a separate "property loan" for this purpose).

Interest rates on construction loans are variable (ie they can change during the term of the loan). But they are usually one percent higher than mortgage rates.

How construction loans work

With a home loan, you usually don't get the full loan amount in advance. Instead, you get the loan in installments to pay the construction work gradually.

Michael Gevurtz, CEO of Bluebird Companies, explains how this works:

“First you create an estimated budget for the entire project. Then at least make the minimum down payment required by the lender, ”he says.

In the course of the construction project, you can use the loan money step by step to cover the associated costs. Each “draw” pays the builder for this completed construction phase.

“Usually the work is done and you apply for a loan repayment,” says Gevurtz.

“The lender sends out an inspector to review the work and approve the request. Then part of the loan can be transferred or transferred to your bank account. "

Types of construction loans

There are three main types of home loans:

A construction-to-permanent loan finances the construction costs as well as the finished house. Upon completion of the work, it is converted from an initial variable rate home loan to a permanent, fixed rate mortgage loanA pure home loan is a short term variable rate loan that is only used to complete the building of your home. In this case, this loan must either be repaid in full or refinanced into a mortgage loanA home loan is for homeowners who also want to act as general contractors for their own project. “These loans can be cheaper and offer lower interest rates than the other two options. However, lenders often see them as very high risk, so it may be more difficult to maintain, ”says Gevurtz. You usually need to be a professional contractor to get one

As with a mortgage, you want to explore all of the financing options and compare offers from several different lenders.

The right type of home loan for you depends on your finances, your schedule, and who can offer you the best interest rate for your situation.

Steps to get a home loan

It can be more difficult to qualify for a home loan than for a conventional mortgage.

"It depends on your financial strength as a borrower, your plans and specifications for the project, your project budget, and your planned activities with the house once it's done," said Robert Withers of M1 Capital Corp.

Each lender has their own application process and requirements. In general, however, you need to provide detailed information about:

EmployerCredit income (score should normally be above 720) Down payment (you will probably need at least 10%) Budget for contractors / general contractors

At some point, the property must also be assessed and inspected.

Once the loan is approved, the loan is finally closed through a title company, as would be the case with a mortgage loan.

Instead of receiving a lump sum payment upon completion, your borrowed funds will be withdrawn on request at every stage of the construction project.

“You should choose a home lender based on their experience in home finance. Shop carefully, ”suggests Withers.

He warns that finding and qualifying for a building loan is particularly difficult nowadays due to the current economic downturn. For this reason, he recommends looking for an experienced and reputable broker to help you compare options.

Building loans vs. Home loans

Home loan funds can be used to pay for land, supplies, labor, and other costs associated with building a house. But what if you want to buy a fixer upper instead?

In this case, you would like to apply for a "rehab loan" instead of a building loan. The funds from a rehabilitation or renovation loan can cover the costs of repairing or remodeling an existing house.

A popular renovation loan is an FHA 203k rehab loan.

"With this (loan) you can borrow funds to buy the house and pay for the desired or necessary repairs or renovations," said Paul Welden, director of the 203k Contractor Certification Program.

“FHA 203,000 loans cannot be used for new buildings. And they can only be used for existing one- to four-unit properties that have been completed for at least one year. "

Welden adds that an FHA 203k loan requires at least 3.5% less (which is significantly less than the 10-20% required for a home loan).

In addition, interest rates on an FHA 203k home loan can be up to one percentage point higher than on a traditional FHA mortgage loan.

Check your eligibility for a home loan (July 7, 2020).

FAQ on construction loans

Do you have anymore questions? Here are some quick answers from Gevurtz to frequently asked questions about building loans.

Can I get a building loan without money?

No, you cannot get a building loan that has nothing below. A borrower must have cash or equity for a home loan.

What are the requirements for a building loan?

In addition to a detailed plan and a qualified, approved borrower, you also need money for a down payment and proof of the ability to repay the loan.

As with a conventional mortgage, proof of your “repayment ability” is provided in the form of credit reports, bank statements, W2s and other documents that show that you have sufficient, stable income to repay the loan.

Is it easier to get a home loan than a mortgage?

Because of the risk associated with construction loans, they are more difficult to obtain than a mortgage.

Do you pay a building loan when building?

When using a construction loan, an interest reserve fund is integrated into the total amount of borrowing that is used to pay interest during construction.

What is the down payment for a building loan?

A minimum deposit of 10% is usually recommended for a home loan, although 20% is often preferable for lenders.

Which bank is best suited for construction loans?

Private lenders and regional banks are often best suited for construction loans. They are capable of taking greater risks and offering more innovative solutions.

What is the average interest rate on home loans?

At the time of writing, Gevurtz says: “Depending on the lender, 4.5% is a typical interest rate for construction loans. That's about one percent more than a typical mortgage loan rate over the same period.

What is a good credit score to get a home loan?

You may need a higher credit rating to get a home loan than to get most mortgage loans. A FICO value of 720 or higher is recommended.

What is the recommended debt-to-income ratio for a home loan?

The ideal debt-to-income ratio for a home loan can vary, but should never exceed 45%.

Is it cheaper to buy or build a house?

It is usually cheaper to build than to buy a house. This is because you can create something exactly as you want it, which is usually less than the cost you would pay to buy an existing home.

However, it is more difficult to qualify for a home loan than for a mortgage. For many people, it is simply more realistic to buy an existing house – especially for first-time buyers.

What are today's mortgage rates?

Interest rates on mortgages and other forms of financing such as construction loans remain at an all-time low. But as always, prices vary from person to person. So get a few quotes to see which lender can give you the best deal.

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