Getting a Construction Loan to Build and Renovate Your Home – Step-by-Step Guide
How you are going to finance your home is one of the biggest decisions you will ever have to take in your lifetime. Whether you’re purchasing or building a new home. Or even renovating your home, you will need to have full knowledge of your financing options.
Well, in this article, we are going to tell you just that. We are going to tell you how you can easily get construction loans Texas to build or renovate your home without any financial hassle.
How do construction loans work?
Construction loans carry a variable rate, however, are comparatively higher than your traditional mortgage loan rates. Construction loan lenders view this loan as a bigger risk and are mostly dependent on the construction timeline and the budget. Plus, construction loans are a little more complicated than traditional home loans are. Instead of a single lump sum for receiving funds, construction loans are paid out in draws.
In most cases, construction loans cover the total cost of the land. Contractor labor, permits, as well as all the building materials that will be needed to construct or renovate the home.
Once a construction loan has been approved, the loan borrower will be put on a draft, which will have the home’s construction stages in it. Also, the borrower will also have to make interest payments during the construction stage of the project.
Now, draws will happen when specific goals and milestones of the home construction or renovation projects are accomplished. For instance, the foundation is laid, the walls are completed, and so on.
During the construction of the house, an appraiser or inspector will keep a check during its various stages. When each stage has been approved by the inspector, the construction loan lender will provide additional payments.
How to get a construction loan?
In order to get your hands on a construction loan, you will need to have a satisfactory credit score, a low debt-to-income ratio, a construction contractor and lender review, as well as proof that you have enough money and inflow of income so that you can repay back this loan in the future.
Borrowers will also have to provide the loan lenders with a certain down payment when applying for a construction loan. Now, how much down payment you will need to pay upfront will depend on the project itself.
Typically, a construction to permanent mortgage requires borrowers to pay upfront 20% of the sales price as a down payment. But, the sales price will depend on the cost of the land and construction. How long the property is owned for, and other funds that may have been used in the project.
But, it is also important to know that FHA construction loans require only a minimum down payment of 3.5% for those home projects that are HUD-approved, and 10% for those homes that are not HUD-approved. USDA construction loans require a minimum down payment of only 10%. While VA construction loans do not require a down payment at all construction loans For permanent mortgage.
