New Construction Loans
* This type of loan is not available by our team and the information below is solely for information and educational purposes
New construction loans are given to qualifying borrowers that are used to build or repair a home. They typically carry a higher interest rate and have shorter terms than traditional mortgages. Unlike other loans, the borrower does not pay the contractor, instead, the lender does. Once the construction or renovation of the home is complete, the construction loan will either be paid in full or converted to a different type of mortgage loan.
Lenders may be cautious about providing construction loans because there is no collateral for their loan yet. This makes the requirements for getting the loan stricter than that of a traditional mortgage. The builder will review the borrower’s finances, as well as an in-depth review of the architectural plans and the builder.
The lender will look at the borrower’s credit history, debt-to-income ratio, repayment plan and assess the required down payment the borrower will need to make. Most lenders will require a credit score of at least 680 to qualify for a construction loan. Lenders generally expect your debts to total no more than 45% of your income, and lower is better. For the construction of home, a down payment of 20-30% will most likely be required. Some renovation loans might require a lesser down payment. Lenders will also want to know what your repayment plan will look like. Whether the borrower will pay in full when construction is complete, or refinance the home into a permanent mortgage can affect the terms on the loan.
Another option that lenders and borrowers have is the disbursement of the construction loan. This works similar to a traditional construction loan, but instead of the lender paying for the construction as a lump sum, the lender will pay in installments called “draws”. Each installment that the lender pays will coincide with an important part in the construction process. Lenders may want an inspection of the home before each draw is sent to the builder. Upon receiving the inspection report, the amount paid will be determined by the progress of construction. Some lenders prefer disbursement of the loan because they see it a safer option than giving the builder an advance of the whole loan.
Construction loans are eligible to pay for the land, plans, permits and fees, the material used to build the home, the construction of the home, interest and contingency reserves, and closing costs.