There are two main types of home construction loans:
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| Arthur Aranda |
Stand-alone construction. With these loans, the lender advances the money to build the house. When construction is finished, a permanent mortgage from the same lender of another lender pays off the construction loan. This is two separate loans and there are two closings.
With a construction-to-permanent loan, there is one closing. At application the lender reviews your financials and the construction plans and qualifies you for a maximum loan amount. During construction, you pay only interest on the outstanding loan balance. Loan disbursements to the builder are made as the work gets completed on the project. The loan converts into a mortgage after the home is built. You can lock a mortgage rate at application, even before construction begins.
In some cases a stand-alone construction loan may be more popular if it allows for a smaller down payment. Because this type of loan doesn't allow a mortgage rate lock in advance, there is a risk of interest rates will rise during the construction period. Another disadvantage is that your circumstances could change during construction, making it difficult or impossible to qualify for a permanent mortgage. And because there are two closings the financing costs will be higher for this option.
Qualifying for a construction-to-permanent loan can be more challenging than getting a standard mortgage. This is because the lender doesn't have the completed house as collateral to back the loan during the construction period.
Your down payment or equity in the completed property must be at least 20 percent of the loan amount. Also, as part of the loan qualification process the lender will determine whether you can afford the loan payments during construction while you're paying the rent or mortgage on your current home.
There are almost always unexpected cost overruns when building a new home. You will need additional savings to pay for these unexpected costs. The lender will need to verify these savings to make sure you are prepared to continue with the construction to its completion.
Typically, your lender will also review the builder's credit standing, financial condition and experience. During construction, the lender will also conduct regular inspections as the home is built. During the construction phase, the lender will disburse payments to the builder in stages called "draws" and send an appraiser or inspector to the building site or to make sure the construction is proceeding as planned.
Arthur Aranda | Mortgage Loan
Officer | NMLS # 1042093
TD Bank, America’s Most
Convenient Bank
NJ1-006-101 | 535 East Crescent
Avenue, Ramsey, NJ 07446
T: 201 741-1537 |
tdbank.com/arthuraranda
