Building Your Dream Home: How to Take Out a House Construction Loan

 Are you looking to take out a construction loan to build your new dream home? Read on to learn how to take out a house construction loan.

 Finding the home of your dreams is tough. In fact, the average house only stays on the market for 30 days, making it incredibly tough to snag the perfect house from the get-go.

That’s why building a house from the ground up is so appealing. It gives you complete control over the design process and you’re able to take your time without having to bid against other buyers.

But getting a loan for a construction project is a bit different than applying for a traditional mortgage. And if you’re not prepared, you could face significant delays on construction.

Here’s what you need to do to get a house construction loan fast.

Know Your Credit Score

Almost all lenders look at your credit score when deciding whether or not you qualify for a loan. And the higher your score is, the better off you are.
Before you apply for a loan, make sure you know what your credit score is.

People with higher credit scores often get qualified for higher loan amounts at lower interest rates. But if your score is on the low side, you may not qualify for the construction loan at all.

You Can Rebuild Your Credit

If your score is low, don’t panic—get proactive. Start paying down your existing debts and make sure you pay your bills on time each month. Missing payments and carrying a balance on your credit cards is a sure-fire way to get your score to drop.

Once you’ve got your debts paid down and you’re happy with your score, apply for the loan. Rebuilding your credit may delay construction on your dream home, but you’ll save money in the long-run.

Have a Down Payment Ready

When you buy a house, you need to have a down payment ready to secure the loan. The same is true for construction loans. But the amount will likely be higher.

Most lenders expect you to put at least 20 percent down in order to qualify for the loan. Some will make an exception if you have stellar credit or an established loan history with the bank.

It all comes down to trust. The lender needs to believe you’re not a high-risk investment and the down payment helps show them that you’re serious about the project.

Think of it this way: if you fail to finish the build and default on the loan, the lender loses money. Your down payment is a way to offset that potential loss and encourage you to see the project through to completion.

Figure Out What Type of House Construction Loan You Need

There’s more than one type of construction loan and the type you choose is largely a matter of personal preference. But they do work in different ways.
Construction-to-Permanent Loans

Construction-to-permanent (C2P) loans pay for the cost of the build. But once the build wraps up, the loan turns into a standard mortgage loan for the rest of the term. This means you’ll have longer to pay the loan off.

Should interest rates change after the house gets built, you can also refinance the loan just like a standard mortgage.

Standalone Construction Loans

Standalone construction loans cover the cost of construction just like C2P loans. But once the build wraps up, you’re expected to repay the loan in full.

If you can’t by the end of the project, you’ll need to apply for a mortgage on the house. This will settle the construction loan and gives you more time to pay back what you borrowed.

Keep in mind it can hurt your credit score. You’ll be taking out additional debt and having credit checks run multiple times.

Regardless of the type of loan you choose, you’ll want to get information on closing costs for the property ahead of time. A rough estimate is enough. This way, you’ll be able to factor those costs into what you borrow.

Speak with Multiple Lenders

When in doubt, always get quotes from multiple lenders.

No two banks or lending agencies will see your situation the same way. One may qualify you for a larger loan at a slightly higher interest rate while another might not give you what you want.

Shop around, compare the loan terms and details, and choose the lender that fits your needs and your budget.

Once you find a lender you’re happy with, get pre-approved for the loan. Use this amount to set your budget with your builder.

Keep in mind that pre-approval is not the same as getting the loan. You’ll still need to apply once you have everything lined up for the project to get started.
 
Find an Experienced General Contractor

Most lenders expect you to work with an experienced general contractor and construction team. Experts have licenses to build in the area and know how to get the job done right from the very start. This protects the lender’s interest in the property and makes them more willing to give you a loan.

If you’re planning on building the house yourself, take the time to create a clear and detailed construction plan. The more information you can give the lender about your ability to build the house just as well as a professional contractor, the more likely you are to get approved.

Complete the Application Process

Once you’re pre-approved for the loan, have your down payment ready, and a contractor to supervise the build, speak with your lender again.
 
You’ll need to sign paperwork and move the application process forward. If you’ve gotten pre-approved, the process should be relatively simple. And you’ll get your funds quickly so you can get to work as soon as possible.

Final Thoughts

Building your dream home is possible with the right house construction loan. Use this guide to make the application process easier so you can get the project started faster.

Looking for additional tips to help you make the most of your new home once you’re done building? Check out our recent posts today!
 
 
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