YOU HAVE A PLAN, a plot of land in sight, Togo Custom Home’s in mind to build and a design in mind…but how do you pay for it?
A home loan for new construction covers the cost of building a new home, splitting payment from the bank to the contractor as certain milestones are made. Loans like these typically lasts for 12 months and then must be paid off or converted to a standard mortgage.
Similar to the standard mortgage process, getting a home construction loan includes the normal underwriting of your loan application and adds a thorough vetting of the home builder.
Construction Loans … How They Work
There are several construction loan option out there, however the two most common, construction-to-permanent loans and standalone construction loans, is what we will focus on today.
Construction-to-permanent Loans, automatically converts to a standard mortgage when the construction is finished. The lender may call this conversion a modification or refinance. The benefits is that the borrower does not have to go through the loan application process all over again, saving time, hassle and monies on a second closing.
Payment on a constuction-to-permanent loan tends to be a little higher than a standard mortgage because during construction the borrower typically pays interest only. It is not until construction is over that the loan is then converted to a standard mortgage and payments are reworked based on the length of time for term of loan.
Standalone construction loans. This is a short-term loan that funds a home construction project that stands on its own. There is no permanent financing upon completion of the project, therefore you do not have financing to live in the home afterwards. You will have to apply for a mortgage for the permanent financing.
One advantage of getting a standalone construction loan is that you will have time to shop for the best terms for the permanent mortgage prior to completion of the new home. A disadvantage already mentioned is that you will have additional paperwork and costs incurred for closings if you decide to go this route.
What You Will Need to Qualify for a Home Construction Loan
Qualifying for a home construction loan your income, debts and credit history will be analyzed. Your loan underwriter will walk you through everything you need by giving you an application and answering any questions you may have in the process.
Prior to contacting your loan underwriter begin to gather the following information which will help you get a head of the game:
- Proof of identity
- Recent pay stubs
- Proof of other income, such as alimony, child support, self-employment, Social Security or disability
- Recent tax returns
- Recent bank statements
- Recent statements for other assets such as brokerage or retirement accounts
- List of your debts with minimum monthly payments
- Other liabilities, such as alimony or child support payments
- Source of down payment
- Current rent or mortgage payments
- Profit-and-loss report if self-employed