If you are planning to construct your dream home instead of purchasing a property, then you require a different form of home loan known as a construction loan. This loan is also suitable for homeowners who are performing major renovations to the property that you've recently purchased or if you are willing to make changes in your existing home. To help you make the most of construction loans, this article explains everything that you need to know about them, who should choose them and what elements should be taken into consideration while selecting an appropriate loan.
What Makes Construction Home Loans Different?
A construction loan is a mortgage meant for those who are building new homes. Based on the way the loan has been designed, you can buy the land first and then build on it within a specific period of time. These loans are not set up like a regular mortgage, rather the lender will consider the entire amount that borrower takes for paying builders and then this amount is broken into desired segments also called as progress draws. These are the percentages of total contract amount paid from your mortgage to builder in various phases of construction.
When progress draws are made, the lender expects that the borrower pays the interest which is due only on the amount that has been drawn so far. The full interest and principal will not begin unless the keys to your new home have been handed over to you.
Who Should Choose Construction Loans?
Construction loans are ideal for those who intend to build a home on vacant land. It also includes land package, renovations, the addition of a new home and more such projects too. Certain property developers take advantage of construction loans for small-scale development, but again it should be noted that these are available only when a specific number of properties are being built. If the number exceeds then the lenders would consider it as a large-scale development, for which you will need commercial finance.
Questions to Ask Before Applying for Construction Loans
Because of the inherent risks that construction loans have, these are usually given to borrowers with a good credit history. In fact, certain lenders do impose strict eligibility criteria to attract only potential customers. Hence, before deciding which loan would be appropriate for you there a few questions that you should ask:
1. Should you purchase land package and house for a construction loan:
Technically, you don't really have to buy a land package or a house for getting construction loans. You might have already bought a vacant land earlier with the help of a traditional home loan. The point is: only when a contract is made between you and a certified builder the loan can be sanctioned.
2. Do you need a licensed builder for the construction?
Majority of the lenders and financial institutions prefer licensed professionals? However, there might be exceptions to this case as certain lenders allow homeowners to build the home on their own. This turns out to be a wise decision only when you are a qualified builder.
3. What are the common clauses of construction loan?
Like most of the home loans, construction loans have their own set of clauses that provides several advantages to the borrower such as providing optimal time for getting the finance? It also keeps you out of the contract obligations if the loan application is not approved and protects the borrower against taking any sort of finance that does not suit them.
There you have it, these are some of the important aspects of construction loans that will help you in taking an informed decision.
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