If you have decided to build your home or some other construction project on your own, rather than buying it, you can’t count on mortgages. However, in this case, you can get yourself a construction loan that you can use to finance the whole process. The first thing you need to know is that there are several types of construction loans.
Getting a loan is not always easy, and it takes serious consideration on your part to make sure that it works for you. If not, you could get into serious financial trouble and, in this case, lose the property you’ve built. This is why it’s important to learn which types of construction loans are out there and find the option that suits you.
We will separate these loans into two categories, residential and commercial.
Construction loan with a mortgage
With this loan, you will get the money to build your home, and once completed, it will be mortgaged. It’s important to understand that the interest changes during construction and after the house has been completed. In some cases, the borrower has to pay a penalty in case the construction lasts more than a year. The borrower also bears closing costs.
This loan is given to borrowers for a maximal period of 1 year. While the construction is ongoing, the borrower pays an appropriate interest on the total loan amount. The whole loan is divided into installments, which are given periodically, while the interest rates keep getting bigger with each new installment.
When the construction period has finished, the borrower/owner gets a home mortgage and is obligated to pay off the loan. The construction-only loan is better because the borrower doesn’t have to get the mortgage from the same lender that gave the construction loan.
A VA loan is a mortgage loan which is backed by the United States Department of Veterans Affairs, and that’s where the VA loan name comes from. This loan is only available to people who are military veterans, reservist, or current members of the military.
Apart from using it to fund new constructions, a VA loan can also be used for buying homes, condominiums, and other residential properties.
VA loan rates move from about 3,5% and up to 4%, depending on the years of the fixed loan. All qualified lenders in the US can issue VA loans. The VA loans can go up to 100% of the costs required to construct a home.
Joint venture loans
With these loans, the borrower and the lender enter a joint venture together. This means that they will both be owners of the property and the business when finished and share their profits or losses accordingly.
Take-out loans are permanent and can be tricky to explain, so we will use an example. In a situation where a builder wants to construct a residential building and is given a loan by the lender, once the project is completed the buyer(s) of the building or the apartments get take-out loans provided by the same lender. The builder also becomes a loan seller and gives his buyers the take-out loan.
Development and acquisition loan
These kinds of loans are resewed for covering the costs of buying new land for construction, as well as all the necessary horizontal improvements that need to be done on that land. These improvements include things like paving the ground, building roads, leveling the land, adding a sewer system, installing electrical systems, and so on.
However, these loans don’t cover all these expenses, and it is required that the borrower invests some money as well. In most cases, the builder needs to cover at least 25% of all the costs of developing the land.
These are some of the most common construction loans, but there are more different options available. When trying to get a construction loan, the most important thing to remember is that you need to improve your credit score. Having a poor one means you will have a difficult time convincing lenders to give you the loan, and if they do, you will get terrible conditions.