If you’re in the market for a new house, you’re probably looking at different loans to pay for it, and you stumbled across a construction loan. How does this loan differ from a traditional mortgage, and is it worth it?
If you’ve found yourself asking these questions, stick around because this blog will explore construction loans and mortgages so you can decide which one is best for your needs.
What is a Construction Loan?
A construction loan, also known as a home loan, is used to fund the construction of a residential home or stick-built house. It covers the costs from the land purchase to the completion of the structure.
The money covers inspections, contractors, and materials needed to complete the build.
What is a Mortgage?
A traditional mortgage purchases a home that has already been built and is backed by an asset. The property serves as collateral for the loan, which means if you don’t repay the money, the lender can resell the property.
The Differences Between The Two Loans
While both loans make it easy to purchase your dream home, there are some big differences to note.
- Loan terms. The repayment term of construction loans tends to be much shorter than traditional mortgages, with a maximum length of 24 months, whereas mortgages can be held for up to 30 years. The construction loan is only meant to last throughout the building phase of a home and is not a long-term financial tool.
- Application process. Both loans require an intensive application process, but a mortgage has an easier process. This is because borrowers wanting a construction loan will need to submit documents like house plans, contracts, drawings, and budgets.
- Draws. With a mortgage, the borrower will receive a lump-sum payment, which can be useful if they need instant access to funds. Construction loan lenders will disburse the funds in draws or stages during the construction project process based on the inspections.
Construction Loan vs Mortgage Requirements
The requirements for each loan differ slightly. Both lenders will look at the credit score and down payment. Construction loans require a credit score of at least 680, whereas mortgages can accept as low as 620.
Some mortgages will require a minimum down payment of 5-10% of the purchase price, but construction loan lenders may require a higher 20% down payment.
Which is Best?
Both loan options are great. Which one is best for you will depend on your personal goals. A mortgage is better if the house is already completed and you’re looking for a long-term loan, whereas a construction loan is great for building projects.
Mortgage Experts in California
Whether you’re looking at a conventional mortgage or construction, at Granite West Funding, our team of mortgage experts can guide you through the process. To schedule your free consultation, please call us at (559) 540-2275.
