Building your own home can make the homeownership journey extra special, but to bring your vision to life, you’re going to need the funds. If you’re looking to fund the build of your dream home, you’ve likely come across the term “construction loan” and wondered whether this is the right option for you. This blog will explore the ins and outs of construction loans so you can make an informed decision about which route you want to go down.
What is a Construction Loan?
Construction loans are short-term financing solutions that typically last around a year or less. These loans are intended to fund the building and renovation of your home, which must be completed within the loan term. Your loan amount will be based on the build project itself, the budget, detailed plans, and timelines.
If you’re considering using a construction loan, it’s key to have a knowledgeable and reliable contractor, as they will provide the lender with a realistic budget, plan, and timeline. Your lender will release the funds once major milestones are met, such as laying the foundations or building the roof.
The construction loan can be used to cover costs like:
- Contractor and labor fees
- Building materials
- The land or lot
- Permits
The Pros of a Construction Loan
Here are some benefits you can look forward to by taking out a construction loan:
- Interest-only payments. Unlike a conventional loan, homebuyers only need to pay the principal amount once the home is complete. This means that during the construction period, you will only be paying interest payments, which can help provide you with more cash during the beginning stages of your project.
- Flexible terms. Construction loans offer more flexibility for home renovation or ground-up projects. Because lenders require documents such as detailed plans, budgets, and timelines, they can create terms that match the project’s requirements. This individual approach can be more advantageous compared to conventional loans.
- Simple transition to permanent financing. Construction loans can make the transition to permanent financing a hassle-free process. Sticking with the same lender can allow you to roll over your construction loan into a permanent loan that meets your needs.
Cons to Consider
While construction loans are flexible and require interest-only payments for a period, they do have variable rates. This means that your monthly payment will decrease or increase based on the market.
Another factor to consider is that because an asset does not back these loans, the loan rates can be higher than those of a traditional mortgage.
Construction Loan Requirements
To qualify for this type of loan, you must be financially stable, with a credit score of at least 680, a low debt-to-income ratio, and be able to make a down payment of approximately 20%. You’ll also need a clear construction plan, schedule, and a home appraisal.
Apply For a Construction Loan in California
All in all, construction loans are worth it if you’re starting a ground-up project and you’re financially stable.
Build your dream home today with a construction loan. The team at Granite West Funding can help you start the process. Call us at (559) 540-2275 to schedule your free consultation.
