How to Close in 2021 with a Construction Loan is a guide to construction loans on The Main Line PA and gives you the best tips for construction loan approval. A construction loan can help you finance your dream home and pay for renovations and home building, but the terms and conditions vary. Have you found a home on The Main Line that ticks all the boxes, but needs some major upgrades to be your ideal? Let’s explore construction loans.
What is a construction loan?
A construction loan is like a mortgage but with a lot more moving parts.
Construction loans are shorter term, higher interest rate mortgages that cover the cost of building or renovating a home. A lender will pay a contractor, not the borrower, in installments as the build progresses. Upon completion of the home build or upgrade, construction loans are either turned over to borrower as a mortgage or paid in full.
Construction loans can be incredible opportunities to build your dream home, but they can also result in big headaches in terms of approvals and contingencies.
Loan Types
Construction-to-permanent loans
Construction-to-permanent loans turn into a permanent mortgage when building or renovating is complete. This is a “single-close” construction loan with locked in interest rates. If you have a solid construction plan and non variable interest rates, this is a good option.
Construction-only loans
Construction-only loan must be paid off when the building is complete. Construction-only loans are an option if you have more cash reserves since the loan becomes due at completion of construction.
Renovation construction loans
The cost of major renovations are wrapped into a mortgage with renovation loans instead of financed. Loan amount is based on home’s value after repairs and renovations and these are what you would use if you do not have cash for renovations. We just finalized a sale on this type of loan, click here to read about the closing.
What will a construction loan include?
Construction loans may include
- Land.
- Plans, permits and fees.
- Labor and materials.
- Closing costs.
- Interest reserves and Contingency Reserves
How do construction loans work?
New construction
Borrowing on a new home does not require collateral to back up the loan, which is why there are more inspections of plans and contractors, in addition to your finances, prior to approval. The way a construction loan is disbursed is in phases, instead of a lump sum, called “draws.” Draws coincide with important phases of the project. Inspections are required prior to most draws.
Home remodel loans
In a tight market, a home that needs a renovation may be a great option. Renovation construction loans, like we had at 189 Chandler, bundles upgrades and repair costs into your mortgage. Some of the most popular renovation mortgages are Fannie Mae’s HomeStyle Renovation Mortgage, Freddie Mac’s CHOICERenovation loan, the FHA’s 203(k) loan and the USDA’s Single Family Housing Guaranteed Loan Program.
The amount you borrow for a renovation depends on an estimate of value once repairs and upgrades are complete. A lender needs to approve your the contractor and building plans prior, which can complicate this process more than a traditional mortgage. The reason you would choose a construction loan over a personal loan is the interests rates and repayment times are lower and longer.
What is a builder review?
Construction loans bring another guest to the party after lender, and seller, and that is the builder. Your builder or contractor needs to be able to deliver plans that are approved by local building authorities, have insurance, blueprints, materials list, work history, and dates. Now your loan is contingent not only on your credit, but also on construction plans, time and budget. Many lenders request builder’s work history and proof of insurance, blueprints, specifications, a materials list, a detailed budget and a signed construction contract that includes start and finish dates.
How to get a construction loan
Like all lending, a minimum credit score, maximum debt-to-income ratio and down payment are required for a construction loan.
5 Requirements for Getting a Construction Loan
- Debt-to-income ratio: Debsts should total no more than 45% of your income, and lower is better.
- Credit score: Loans require 680 or higher, in 2021, you should have high 700s.
- Down payment: A 20% to 30% down payment is typically required for new construction, but some renovation loans may be less. Because of market conditions in 2021, I would not recommend trying to get a loan of this type with less than 20%.
- Repayment plan: In a construction-only loan, the lender might want to know if you’ll pay the balance in cash or refinance when building is complete.
A few items to consider and to ask your realtor. Many lenders do not offer construction loans, so be sure to compare rates and terms. Prequalify with Lenders for Construction Loans, well in advance. Underwriting is usually the same as for a traditional mortgage, however, it may take longer to close because more parties are determining future value after a renovation or build.
Did you find How to Close in 2021 with a Construction Loan helpful? How do we know so much about helping buyers with construction loans on The Main Line? We just closed on one at 189 Chandler in West Chester. Details here! Let’s talk about your buying options on The Main Line here.
Looking to buy on The Main Line? View our Buyer Seminar!