Residential construction loans are loan products that can provide you with the necessary funds to build your own property. These loans differ from regular mortgages and have specific characteristics that ought to be taken into account prior to filling any kind of loan application. Moreover, given that they are scarcer than mortgages, you should be prepared before applying to ensure not getting declined.
Why Residential Construction Loans?
Though when referring to construction loans almost everyone thinks that we are talking about residential ones, the distinction is important because there are other types or subcategories that are available to the public. For instance, there are industrial and commercial construction loans too. It all depends on the type of property you are planning to build.
Therefore, the residential flavor of these loans has certain particularities that mainly refer to the amount and conditions of repayment that should be considered when analyzing the loan type. Furthermore, these loans can be converted into a mortgage once the property is fully completed in order to provide more flexible financing and longer repayment programs.
Residential Construction Loan Types
Depending on who is responsible for the actual construction and timing, the loan is called owner builder loan or custom contractor loan. The former loan requires the owner to be responsible for the project execution in a timely manner while the second one defines a constructor or construction company who assumes responsibility for the termination of the project. Finally, there are also remodel construction loans which are customized for making additions to an existing property.
Each loan type is different and so are the requirements for approval. Therefore, you need to analyze your project thoroughly and match it with the proper type so you can benefit the most with the chosen one.
Pre-qualifying for a construction loan is important if you want to get approved for a loan with the terms that best adjust to your financial and credit situation. The advantage of pre-qualification is that you can contact the contractors knowing how much money you can count on and the costs that funding your construction project with a loan will have.
During the pre-qualification process your credit and income capacity will be assessed in order to determine the amount, the interest rate that you will have to pay, the repayment schedule and the rest of the terms.
This loan type provides different alternatives. There are both variable rate and fixed rate too. The rate can be locked during qualification. Also, the repayment programs can have different terms. There are loans for six-month projects, one year projects and up to two years projects or more depending on the magnitude of the development. The time frame will also be determined, as explained above, by the borrower’s credit score and history. Though these repayment schedules may seem too short, truth is that these loans can be converted into mortgages once the property is completed. If you select this loan plans with conversion, then, the construction loan will be an interest only with small payments till the conversion is done.