![]() The stand-alone could also help people who have less money up-front to get into their property, because they could use the finished home as collateral to secure a better rate for the mortgage.Īnother strategy is to look to the government for any existing programs that might be applicable to your situation. The stand-alone would allow this borrower to put more money down once they sell their existing home – which they could not do with the other loan type. One benefit of the stand-alone loan is for people who already own a property and may be looking to sell it when their build is completed. The clear benefit it has over the other, is the single set of closing costs to get the full loan amount, and an ability to fix the interest rate earlier. This loan type will usually require more of the borrower, in terms of down payments and credit scores. Construction-to-permanent loans: a more common type of real estate loan, this one will combine the two loans (build, mortgage) into one 30-year loan at a fixed rate.The payments made during the build are interest-only, and then you settle your balance as you roll the principal into your 30-year, fixed-rate mortgage. The interest rate is variable during the build period and becomes fixed for the mortgage part of it. You will usually have two sets of closing (and associated costs) with this loan type – at the beginning, and then again as you refinance the larger mortgage. But the unique trait here, is the construction loan is handled as a separate loan to the mortgage that follows – the lender uses the first loan, to get you locked into securing the larger second one. Stand-alone construction loans: the name of this loan is a little confusing, as it WILL include a longer-term mortgage as well.Though sharing the commonalities already mentioned, they differ in the benefits they could present to you, as a borrower. There are two types of real estate construction loan: a stand-alone construction loan, and a construction-to-permanent loan. How the loan works more specifically depends on the type on loan you secure, and who you secure it with. Everything works off schedules and milestones that you had clearly set out to the lender to secure financing. You will make interest-only payments during the building period, typically based on a variable rate.Įxpect your lender to check-in every time before disbursing draw-period funds, to make sure the project is adhering to the schedule pre-approved by you, the builder and the lender. They are on a predetermined draw schedule to cover the costs of building. With a construction loan secured, you will receive installment payments for that first year of building. The larger part is usually 15 or 30 years. Most often, construction loans are short-term loans (one year or less) that turn into a longer, more conventional mortgage when building is complete. FICO – as a real estate construction loan is often lacking a home as collateral, the borrower’s FICO score is much more important than it might be in other financing.Expect much more scrutiny, supervision and direct activity with your lender ![]() plans – you will need to provide detailed plans and timetables to qualify for this type of financing.If you own property already, you actually may be able to leverage it as collateral, and get better terms for your construction loan land – usually, the property on which you will be building is included in the real estate construction loan.Banks are where you need to concentrate your efforts seeking this kind of financing, most often, as well as some government programs banks – while mortgage companies might be most common with securing a conventional mortgage, they tend to shy away from the complexity and risk of real estate construction loans.This article will help you to understand some of the basics about new construction real estate loans so that you can one day also claim your own part of the American dream.īefore delving into the specifics of loan types and how they might work for you, there are some commonalities shared by all real estate construction loans, including: The complication is that real estate construction loans are more complicated than a normal loan, so you have to do a little more legwork. The good news is that if you are looking for help in achieving a similar dream, there are programs and loans that are ready to help you. Many people might never act on it, while many others certainly will: finding ways to save and plan, and one day build the home they always wanted. To build a new house is a dream shared by many Americans. Understanding Real Estate Construction Loans
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