How Do Construction Loans Work?
Updated: Feb 16, 2022
The local housing markets are booming in just about every corner of the U.S. with a lot of people buying homes. If you have been on the quest for one of your own, but haven’t found it - don’t settle. You can settle on a pair of jeans or even on a new microwave. But a house? No way.
If you can’t find the right home, why not build it? A construction loan may help.
How Do Construction Loans Work?
Construction loans are different from a mortgage. Yes, the bank is giving you a loan for a house. But, these loans are short-term, high-interest loans that cover the cost of building or renovating a home. If you are approved, the money doesn’t end up in your bank account - it instead gets delivered to the contractor in installments. As different phases of the build or renovation are completed, more money is released for the next phase.
It is important to note that qualifying for a construction loan is often a bit tougher than for a regular mortgage. You will want to have a solid credit score, a decent down payment, and sizable savings to ensure your approval.
Depending on the type of loan you have, when the house is completely done, construction loans can either be paid in full or converted into a mortgage. There are four common types of construction loans, including:
Construction only loans
Renovation construction loans
Construction-to-permanent loans are those that convert into a mortgage (in your name) once the contractor is done with the building. With this type, you get a loan, a set interest rate, and you close one time. These are often referred to as single-close construction loans.
If you are looking for the simplest solution, this is it.
Construction-only loans are a little more involved. They don’t automatically convert into a mortgage, but rather need to be paid off once the construction work is done. This means that you must either have the cash set aside to pay off the loan or you need to have qualified for a mortgage that will pay off the construction loan.
This type of loan requires multiple closings and potentially multiple closing costs.
Renovation Construction Loans
If you are buying a house that needs a lot of repairs, then you may need extra funds. There is only one closing because the funds for the renovation are included in the mortgage. The lender bases the mortgage amount on the value of the home after those repairs take place.
This simple construction loan is one in which the builder themselves pay for the home to be built. You still get your specifications with the contingency that - once it is built - you buy it directly from the builder with a mortgage that you take out.
What Do Construction Loans Cover?
Regardless of which type of construction loan you are interested in, they all pretty much cover the same thing - everything necessary to build or renovate a home! This includes:
Plans and permits (including any necessary fees)
Interested in a Construction Loan?
At District Title, we want you to find the home of your dreams. And, if that means it has to be built, well we can help guide you in making that happen with title insurance and a construction loan.
To learn more, call our office today at (202) 518-9300.