How to Choose a Construction Home Loan
A construction home loan is designed to provide a home buyer with the necessary funds to finance the building of a house. The money so raised can be utilized to pay the contractor at different stages during the construction of the building. In this way the lender maintains a level of control over the contractor by only paying when certain phases of the construction have been completed to his or her satisfaction. It is normal practice for the lender to release sufficient money for the builder to begin work after which smaller draw downs are made throughout the process until the job is completed.
Obtaining an appropriate construction home loan can be complicated however but it is worth the trouble once it all comes together, especially if you are your own main contractor and your home loan is unconventional. In order to help make the process a little more understandable the following points outline what has to take place:
• The first step is to have your plans professionally drawn up and fully costed before placing them before your lender for home loan approval. The lender will then have an appraiser complete a preliminary assessment of the assumed value once the house is completed from the plans you have submitted. Construction home loans require management by a local financier until the home is completed, as such loans are not sold on the secondary mortgage market. After completion you can arrange to have the construction home loan converted to a regular home loan.
• Your next step is to either make a deposit to the lender or purchase the lot of land that the home is to be built on. This acts as sufficient security for the loan at this stage. The lender needs to see the level of your commitment to the project and your equity in the project right from the beginning, goes a long way in demonstrating this commitment. It will help if you own your building block outright.
• Before committing yourself to the first offer made it will pay you to look around to see what other lenders are offering so that you can make a proper comparison. Construction home loan interest rates vary much more than do regular home loans, sometimes as much a three percentage points higher, as there is not the same level of competition in the construction home loan market as there is in the regular mortgage business.
• You must take out a builders risk insurance policy to protect yourself and your lender against any storm or fire damage. This is important even if your have contracted the work out to a builder who has commercial liability insurance. You will need the extra cover to fully protect your own interests and that of your lender for total coverage.
• Some construction loans are designed to finance the building of your home only, while others are framed around that of a more traditional mortgage. While the basic elements of the loan are much like any other, you may find it necessary to have the loan changed to a more regular home loan after the construction is completed in order to get the range of benefits that a more flexible mortgage offers.
The main benefits derived from taking out a construction home loan is that it creates a means whereby you can borrow sufficient money to build your home, even though you have little security to guarantee the money being loaned. Normally the money borrowed is secured by the value of the home but in the case of a construction home loan the lender is risking their money on th basis of a plan. This is why a down payment is required in lieu of the borrower putting up the building lot as the initial guarantee. A construction loan also gives you time to look around for more permanent financing once the construction is complete.
Because of the inherent risks involved for the lender, construction home loans are normally only offered to borrowers who have very good credit histories. The eligibility criteria is much more stringent for construction home loan applicants than it is for borrowers applying for a more traditional home loan. The initial down payment that is required is usually quite significant, especially if the building lot is not of great value without a building on it, most lenders will want at least 20 percent of the total cost put down as a deposit.
Considerable costs are involved in building your own home. Where you can purchase an existing home with a comparatively small amount of money needed for a deposit, this is not the case with a construction home loan, as many lenders require you to own your own building lot outright as well as a 20 percent down payment. This is a factor that prevents many from borrowing a construction home loan in order to build themselves but prefer to buy an existing property with a more traditional mortgage that is easier to obtain.
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