If you need to build a home for investment purposes, a construction loan can give you the funding you need to complete your project.
While these loans have a few similarities to the standard mortgage, they also have some significant discerning differences.
Read on to learn more about what you can do to be approved for a construction loan and what makes them unique.
A Construction Loan Has Different Terms
Unlike a traditional mortgage, construction loans are short-term, which means they typically have a maturity period of one year or less. When you receive a construction loan, you’ll pay the interest rate only.
The sooner your construction project is over, the less you’ll pay in interest. Once the job is complete, you can convert the loan over to a mortgage.
The interest rate on these loans is higher than a standard mortgage so it’s important to keep this in mind when you apply. Your lender will base the amount of the loan on the value of the project once it’s complete.
Loan Types Differ Based on Your Goals
Construction loans come in several forms, so it’s crucial to know which option is right for you. A construction-to-permanent loan means that the bank will pay your builder as the work is done, then transfer the loan to a mortgage. The payments to your builder are called “draws” and will be paid out as each phase is complete.
A construction-only loan must be paid off in full as soon as your property is ready to be sold or occupied. If you can’t pay the amount in full, you’ll need to convert the loan into a mortgage to get manageable monthly payments.
If you’re buying a home that needs renovation, a renovation construction loan is ideal. There are some government loan programs available for this type of loan. The cost of renovations is rolled into your mortgage along with the purchase price of the property.
Pros and Cons
Like any form of financing, there are perks and drawbacks to getting a construction loan. One benefit is that you’ll only have to pay interest on the loan while your project is being constructed.
Another perk is that you’ll have more time to shop for a great interest rate when you’re ready to move it over to a mortgage. One of the drawbacks is that construction loans are much more difficult to get.
Many lenders require at least 20-percent down on a loan of this type. If you don’t have the cash, this type of loan might not work for you.
Make Your Loan Work for You
From an investment property to a flip, a construction loan can help you achieve your goals. Make sure you understand the terms and conditions of these types of loans for a profitable outcome.
If you need help with financing or need more information, visit our website to get a quote today.