Getting A Construction Loan
Construction loans give you the ability to build the home of your dreams, whether it is your primary or secondary residence. You must select the right lender and the correct type of construction loan to have the best experience possible.
A construction loan is a short-term type of loan thats used to pay for building a house or other real estate project. The best construction loans have competitive fixed interest rates, low down payment requirements and other additional benefits such as fast loan approval or the ability to lock in an interest rate for a set time. Lets take a closer look at how construction loans differ from other popular loans and four of the best construction loans of 2019.
- U.S. Bank: Best for customer support
- Wells Fargo: Best for reducing interest rate payments
- Normandy: Fastest loan approvals
Things You Should Know When Getting A New Construction Mortgage
One of the most important things to think about when getting a new construction mortgage is the New Home Warranty policies. Before releasing the funds from each draw, the lender will send out an inspector to make sure that the home builders are following these policies. Failure to follow these policies could result in you not getting the funds you need.
Another thing to know is that you, as the borrower, are responsible for inspection costs. Generally, you will have to pay these out of your pocket, although some lenders will let you deduct appraisal and progress inspection fees from your draws.
You should also know that no accommodations for any changes or upgrades made to your home can be made by changing the amount of your mortgage once it is signed and approved.
What Are The Most Common Investment Property Loans
Investors try to use a conventional mortgage to buy a property with one to four units if they can meet the banks criteria because this is where theyll find the lowest rates and fees.
To buy a home to renovate and resell or lease, investors often turn to private lenders that specialize in this process. Many banks either wont provide these loans or take too long to close for an investors preference, so private money lenders are successful here.
Private and hard money lenders are also helpful when investors want to buy commercial properties like apartment complexes, medical office buildings, or office towers for example. Their terms are more flexible than conventional mortgages and they will work with borrowers who have lower credit scores where banks and credit unions may not.
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Cmhc National Housing Co
The fund is designed to finance the development of energy-efficient, accessible and socially inclusive housing throughout Canada. The housing can be for mixed-income, mixed-tenure and mixed-use affordable housing purposes. Builders can receive up to a 95% loan-to-cost through low-interest and forgivable loans.
The low-interest loans offer a 10-year fixed interest rate. You can also receive up to a 50-year amortization period. Projects with low cash flow are eligible to receive forgivable loans. However, they will not be prioritized for funding. You can learn more and apply to the program throughCMHCs National Housing Co-Investment Fund webpage.
Does A California Construction Loan Make Sense For You
There are many factors to consider when deciding if a construction loan is the right choice for financing your new home. One of the most important is the amount of equity you have in the property. If you own the land outright or have a large down payment, you may be able to finance the construction of your home with a conventional mortgage. However, if you dont have a lot of equity or meet downpayment requirements, a construction loan may be the only option.
Another factor to consider is the interest rate. Construction loans typically have higher interest rates than mortgage loans, so youll need to factor that into your budget. The good news is that the interest is usually only charged during the construction phase, so once your home is completed, you can refinance into a conventional mortgage with a lower interest rate.
Another thing to keep in mind is that construction loans are usually short-term loans, so youll need to have a plan in place for how to pay off the loan once construction is complete. One option is to sell the home and pay off the loan with the proceeds. Another option is to refinance into a conventional mortgage.
If youre looking to explore construction loans in other states, check out our national guide to construction loans and get started exploring all 50 states.
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Build/construction Loans And Land Financing
As part of our investment in the Vermont and New Hampshire communities where we do business, Union Bank offers Build Loans for new home construction, additions, renovations or small commercial buildings.
Borrowers with suitable experience can act as the general contractor or perform someor allof the construction. Union Bank also offers Land Loans to help you finance the purchase of land, whether its improved or a raw land parcel. Overall, Union Banks Home Construction Financing takes you from beginning to end, all with the same lender for new construction.
Financing For Construction And Land Loans
We are also flexible with our financing options. For Land Loans, Union Bank offers either fixed financing, with a set interest rate and fixed payment over the life of the loan, or adjustable-rate financing, which has a variable interest rate and payment that may change over the life of the loan. For Build/Construction Loans, we offer an eight-month term at competitive rates with the possibility of a four-month renewal.
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How Can You Get A Construction Loan
Is it harder to qualify for a construction loan? Yes, construction loans are harder to get than a typical mortgage. Most lenders consider construction loans risky , so youll face some stiff requirements if you decide to apply. Here’s what many lenders require for a construction loan:
Down payment:To get a construction loan, youll need to make a down payment of 20% or more of the cost of the total project. This means that you will need to be prepared to start the project with your own funds or assets before a lender will agree to loan more. If you already own the land, for example, its likely that you will be able to use that toward the down payment amount.
Talk to your lender about this. The particular amount of your down payment will depend on the cost of your project, the land, and what you plan to do with the funds. Lenders require high down payments as a way of making sure youre invested in the project and wont vanish if things go wrong during construction.
Strong personal credit:Anytime you apply for a construction loan, youll need to provide the lender with your personal credit history–even if you are applying as a small business. The lender will almost definitely want to see your personal FICO score and your business credit history, too.
Specific plans:To qualify for a construction loan, you must have specific and detailed building plans, construction contracts, and cost estimates ready.
What Type Of Loan Is Best For Building A House
While a traditional mortgage finances buying a house, a construction loan provides money for building a house. Construction loans have shorter terms and higher interest rates than traditional mortgages. The lender pays the loan proceeds in installments to the contractor as building progresses. Once the home is completed, the construction loan is paid in full or converted to a permanent mortgage.
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Best Overall: Nationwide Home Loans Group A Division Of Magnolia Bank
Nationwide Home Loans Group
Nationwide Home Loans Group is a great overall choice for a construction loan with loans available in most states, low interest rates, and low down payment requirements.
640 minimum credit score required
Not available in Alaska, Hawaii, or New York
Minimum loan amount of $125,000
Nationwide Home Loans Group is a division of Magnolia Bank, an independent community bank founded in 1919. The bank has grown its services to lend in all 50 states and originates over $1 billion in home loans annually. However, the Nationwide Home Loans Group construction loan is only available in 47 states.
Their construction loan size minimum is $125,000. Interest rates fluctuate based on the market, but Nationwides rate range is 1% to 1.25% higher than traditional mortgages for a pre-built home. No mortgage payments are collected until the construction is complete.
The lender requires the borrowers median of three to be at least 640. Down payments vary depending on the particular loan program. For example, their VA construction loan can be as low as 0% down, and their FHA loan can be as low as 3.5% down. Compared to most construction lenders requiring 20% down, the fact that Nationwide can offer these low down payment programs at low rates in a combined loan in 47 states, is why they won our best overall category.
Best For Low Down Payment: Go Mortgage
- Loan types: FHA, VA, USDA, Fannie Mae
- Minimum credit score: 580
Offers a variety of loan types
Low credit score requirement for some loan types
One-time close construction loans
Fannie Mae construction loans require a 680 credit score
Limited state availability
GO Mortgage operates several brands, including singleclosing.com, which provides construction loans. It’s a relatively young company and is headquartered in Brookfield, Wisconsin, and combines technology with old-fashioned customer service. GO Mortgage offers home loans, construction loans, VA loans, jumbo loans, FHA loans, and reverse mortgages.
GO Mortgage is our pick for the best construction loan lender with a low down payment because it offers loans that require no down payment and others that only require a 5% down payment. In fact, GO Mortgage specializes in low down payment government-backed loans. It also lends in 38 states plus Washington D.C., and its lending team has advanced training in government-backed construction loans.
GO Mortgage offers the following:
- Single-close construction loans to reduce closing costs
- No payments during the building phase on FHA, VA, and USDA loans
- Construction loan minimum: $125,000
- Down payment: Starts at 0% for VA loan and 3.5% for FHA loan
- Rates vary depending on loan programs and borrower qualifications
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Do Construction Loans Cover The Design Phase Of Home Construction
No. Prospective custom home builders have to self-finance the design phase of the home building contract. In addition, before you can take out a construction loan, youll need to produce a builders contract, construction timetable, designs and a realistic budget. All this needs to be done even before beginning the loan application process.
Normandy Fastest Loan Approvals
Normandy typically charges an interest rate of up to 10.95% APR and requires a minimum deposit of 25% for construction loans. Its ideal for time-strapped customers, as loan approvals generally occur within 21 days. It also provides the option for a 14-day fast-track closing for a fee of $1,250. Loans are available from $100,000 up to $4,000,000, with terms generally up to 18 months. Longer terms may be available on a unique case by case basis.
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Can I Use Any Excess Funds For Home Furnishings
Borrowers never actually touch the funds made available through construction loans because theyre paid directly to the builder.
The contractor only receives payment for the work performed, and the borrower only pays interest on whats paid out. You do save money if construction costs come in below the original amount of the loan, but youll have to find some other source of funds for that flat screen.
The Construction Loan Process
Heres an overview of how the process works:
Step 1: Apply Online
Once we determine which loan program best suits your needs and you have a contract with the builder of your choice, its time to apply for your mortgage.
In addition to the usual financial documentation required for a loan transaction, we will also request copies of your construction contract, plans and specifications, as well as the required insurance policies needed to start the process.
Step 2: Planning a Disbursement Schedule
Your contractor or builder will need to agree to our draw schedule. This is simply a plan for when payments will be made to you based on completed project milestones.
There are typically 5-7 disbursements depending on the size of your project.
Heres an example of a disbursement schedule:
Draw 1 – Foundation
Draw 2 – Framing, roof, exterior doors and windows
Draw 3 – Plumbing, HVAC, electrical, insulation, and drywall
Draw 4 – Interior doors, cabinets, and countertops
Draw 5 – Flooring, finishes, and Certificate of Occupancy
Step 3: Appraisal
An appraisal will be ordered based on the plans and specifications of your project. The appraisal is utilized to help ensure that the homes ultimate value will be adequate for the loan amount.
Step 4: Mortgage Approval & Closing
Once all documentation has been approved by the underwriter, you will proceed to your loan closing or settlement. Once settlement has occurred and building permits are secured the construction of the home can begin.
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Why You Can Trust Bankrate
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our mortgage reporters and editors focus on the points consumers care about most the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more so you can feel confident when you make decisions as a homebuyer and a homeowner.
Is It Hard To Get A Loan For An Investment Property
Qualifying for an investment property loan is more challenging because lenders view investment properties as a greater risk. Lenders will want to make sure that you earn enough to afford monthly mortgage payments in the worst-case scenario, such as your tenant stops making their payments.
Compared to loans for your personal residence where you may qualify for a 0% or 3% down program, lenders want to see a larger down payment on investment properties, often between 20% to 35%.
To get the best rates and terms, youll want to get a traditional mortgage, which is why most of our winners here have come from that sector. However, you can max out at four conventional loans for investment properties. If you want to keep going, youll need to convert to private and hard money lenders
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Determine Your Construction Loan Need
Before you apply for a construction loan, you should assess your situation in order to determine exactly what type of construction loan will work best for you. You should consider factors including your savings for a down payment, credit score, and overall loan amount when looking for lenders. Its a good idea to receive quotes from contractors so you have an estimate of how much the total project will cost.
Best For Commercial Property: Lendio
Why We Chose It: We chose Lendio as our best for commercial property loans because their marketplace platform is the easiest way for an investor to fill out one application and receive offers from multiple competing lenders.
Wide variety of financing options and lenders
Personalized guidance and expertise to help you interpret your loan offers
High interest rates on some loans
You have to fill out their online application to see loan terms
Lendio is a free online service for investors where users receive potential commercial loan offers within minutes from the company’s marketplace of more than 75 lenders. Over 300,000 loans have been funded through Lendio, giving it a good reputation for success.
A marketplace like Lendio is great for commercial property investors because they can quickly and efficiently shop for the best terms. Unlike other commercial property options, they make the process simple with one application to shop rates.
Lendio lenders underwrite residential, multi-unit, and commercial real estate loans, as well as an array of business loans too. Down payments can be as low as 3.5% if you qualify for one of the agency loans, like FHA. Otherwise, traditional commercial property loan programs require 25% to 30% down.
Interest rates start at 4.25% on the Lendio platform for commercial property loans. Terms range from 20 to 25 years and take a minimum of 45 days to fund. Commercial property loan amounts range from $250,000 to $5 million.
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Apply For A Construction Loan
To apply for a construction loan, there are a few types of documentation youll need. These include architectural plans and drawings, your builders certifications, building code compliance, and a schedule for periodic inspections. Youll also need to provide a detailed construction budget and timeline. Before you apply, its also a good idea to make sure that your finances are in order. You should make sure that your credit score is as high as possible, that you have a low debt to income ratio, and that you have enough in savings to cover the cost of a down payment and closing fees.
How To Qualify For A Residential Construction Loan
When applying for a residential construction loan, be prepared to provide the following:
- Construction timeline: What timeline do you have in mind for completing your home construction?
- Realistic budget: Your lender will want to know how much you expect everything to cost, so prepare a realistic budget outlining all costs associated with the project.
- Detailed plans: Along with your budget, have the overall plans for your construction project available so the lender is aware of what is being financed. You will likely be asked to provide plans or blueprints from your builder or architect.
- Traditional mortgage documents: You will also need to provide all the traditional documents youd submit if you were securing a typical home mortgage including tax returns, bank statements and pay stubs. With a construction loan, your builder may also be asked to provide some financial information.
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