Rear View Of Loving Couple Looking At House. concept: Home Construction Loan
Jordan Schneir
By: jordan_shneir
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Build your Future: Types of Home Construction Loans

Sometimes, you just can’t find the perfect home for you and your family. That doesn’t mean you need to give up on your dream of having the home you’ve always imagined. 

In situations like this, building your dream house might be the perfect solution.

Of course, like buying a house, building a new home is a serious investment, and it requires financing. 

But what type of loan do you need to build a new home?

Whereas buying a home requires a mortgage, building a new home requires a construction loan—a short-term, high-interest loan designed specifically for financing the building or rehabilitating a property.

Let’s take an in-depth look at what construction loans are, whether or not you should consider getting one, and what the different types of construction loans are.

Builder On Site Looking At Digital Tablet With Apprentices. concept: Home Construction Loan

What is a Home Construction Loan?

Essentially, home construction loans are high-interest, short-term loans intended to be used to finance the construction to build a new home.

These loans can be used to cover most construction-related expenses, including:

  • Land
  • Labor
  • Materials
  • Permits
  • Building Plans
  • Fees
  • Closing Costs
  • And More

However, unlike personal loans that offer a lump-sum payment, home construction loans are paid out to the contractor in installments according to building progress milestones. Milestones might include things like pouring foundation, framing, and similar checkpoints.

Since a home can’t act as collateral when it hasn’t been built yet, home construction loans can be challenging to be approved for and often require a thorough inspection of your building plans as well as your contractor.

#DidYouKnow Home construction loans usually have variable rates that move up and down depending on the prime rate.

There are also renovation construction loans, which allow you to wrap renovations costs into your mortgage. The amount of the renovation loan depends on the estimated value of your home after renovations. These loans can be great for those who find the perfect fixer-upper but don’t have the money to finance repairs independently.

Should I Get a Home Construction Loan?

There are several reasons you might consider getting a home construction loan. Reasons to get a construction loan might include:

  • You want a home with particular features
  • You want more land
  • You can’t find an existing home that meets your needs

#CaminoTip If you only need to make minor repairs or renovations, though, a personal loan might be a better option. Personal loans can be more flexible, easier to qualify for, and can be used to cover just about any expense—including home repairs.

Essentially, if your dream home doesn’t already exist, you can use a construction home to bring it into reality. 

However, there are some other factors you should consider before applying for a construction loan.

  1. First, you’ll need to make sure you meet the requirements. Typically, you’ll need to have a good-to-great credit score, a 20% down payment, a low debt-to-income ratio (below 45%), and proof of a stable income.
  2. Home construction loans are considered very risky for lenders, so you’ll likely have to meet stricter requirements than you would with a traditional mortgage.
  3. You should also consider that home construction costs can be unpredictable, so your construction loan may not cover every expense. As such, you should be sure to have adequate savings for additional building costs.
  4. Lastly, keep in mind that these are short-term, high-interest loans—meaning, if you’re not confident you’ll be able to pay off your construction loan on time, it might be a good idea to put it off for a while.

That being said, if you want to build your new home so that it meets your wants and needs, then a home construction loan can be an excellent option for you.

Estate agent shaking hands with customer after contract signature. concept: Home Construction Loan

Types of Home Construction Loans

There are several different types of home construction loans:

  • Construction-only loans
  • Construction-to-permanent loans
  • Renovation construction loans
  • Owner-builder construction loans
  • End loans

The table below has all the different types of construction loans, what they are, and who they are best for.

Loan Type What it is Who it’s best for
Construction-Only Loans The borrower must be approved and pay for closing costs, and the loan must be paid off when construction is complete. Those who have a large savings fund and plan to find a mortgage for permanent financing.
Construction-to-Permanent Loans Becomes a permanent mortgage after construction is completed. Those who prefer predictable interest rates and have a clear construction plan in place.
Renovation Construction Loans Major renovation expenses become part of your mortgage, and the loan amount is based on the value of your home after renovations. Those who have purchased a home in major need of repair but don’t have the money to finance renovations.
Owner-Builder Construction Loans Construction-only loans for borrowers that plan to also act as the home builder for the construction. It can be harder to find than the other types of construction loans. Those with extensive experience in construction and want to oversee the building process.
End Loans End loans are essentially the same as mortgages. End loans are regular mortgages that you take out after construction is completed. Everyone who needs permanent financing after building a new home.

As you can see, there are several different types of construction loans, and the best option depends on your specific wants and needs.

Keep in mind that the home construction process can take quite a while, and there are a lot of different variables to consider, so it’s essential to take your time when choosing a financing option.

Your Dream-Home Can Be a Reality

It’s not always easy to find the perfect home for you and your family. In some cases, the right house might not even exist yet.

When this happens, home construction loans can be a great way to get the financing you need to build the home that meets all of your wants and needs. 

By reviewing the information in this article, you can find the perfect construction loan to finance the building of your new home.

If construction loans don’t meet your needs, be sure to request a quote for a personal loan. Personal loans have competitive interest rates, low fees, favorable terms, and can be used to finance nearly any expense, including home repair costs.

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