Everyone dreams of building a new house. Yet, it’s not as easy as it seems.
You need an average of $286,175 to build a new home. That’s roughly $150 per square foot for a 2,000 square foot home.
But because that’s an average estimate, that figure can still go up (or down), depending on the cost of materials and design of the house. And most importantly, the location.
For the typical employee who earns, let’s say $857 per week, building a house seems like a far-off dream.
Don’t give up just yet! Do you know how residential construction loans can serve a vital purpose in this dream of yours?
With these, having your dream house is easier than ever!
What’s more, they’re now more widely accessible, thanks to finance companies.
To help you start, here’s a list containing everything you need to learn about these loans.
What is a Residential Construction Loan?
Do you want to build a house or renovate an existing one? One of your best options is to get a residential construction loan.
It’s a finance program for homeowners wanting to renovate an existing property or build a new one. It’s short term, but it can cover the cost of building a house.
Keep in mind though, that you won’t get cold cash. The process involves the lender paying the contractor in installments. They pay funds after the contractors complete each building milestone.
Once the construction is complete, the lenders then pay the loan in full. Sometimes, they may convert it to a permanent mortgage.
In any case, this loan offers you a good way to start the building process.
The lender approves the loan before you build. They will only charge interest during the construction. This way, the building process is continuous and convenient.
Eligibility Requirements You Need to Know About a Residential Construction Loan
Anyone with a good credit score and history can apply for this type of loan.
When you’re planning to build a home, the first snag you need to face is your credit score and history. If you have less-than-stellar credit, you’d want to polish it first to make it more attractive to lenders.
Let’s put it this way. When you don’t have a good credit score, your loan borrowing cost increases. Usually, with a credit score of below 300, the interest rate can go up 2 percent or more.
A credit score rates your credit risk at one point. The report shows lenders if it’s worth giving you credit. They can also decide on the terms.
There are a number of factors influencing this. Your payment history, outstanding balance, and length of credit history are just some of the biggest determiners.
What are the Corresponding Fees and Rates to Pay?
The typical fees for a residential construction loan you need to know about include document fees. In some cases, you need to pay closing costs and origination fees.
Interest rates depend on the lender. Some lenders do not include principal and interest payments yet. They may allow interest payments only until the construction is complete.
Also, they charge the interest on the used funds. It will ensure you only pay interest on the actual amount borrowed. This protects you from paying for funds you did not use.
How Can I Make Sure the Funds Are Properly Used?
The lender will inspect to make certain the builders will conform to the plans agreed upon. But of course, you should always check on each phase of the construction. It’s important to know about the specifications of the construction contract.
Also, you need to check the work progress to make sure the builders maximize your budget. You don’t want to overspend on the construction of your new home. Overspending beyond your limit might pose a problem later on.
The lender may need to check the construction pace to know the approximate time of completion. It’s for this reason you also need to inspect the construction yourself.
How to Get a Residential Construction Loan?
Let’s face it. Building a home is a complicated process.
First off, you need money to start the process. Also, you need to go through the tedious process of getting a loan.
Fortunately, lenders provide fast approvals, competitive rates, and flexible options.
The best step to do is find a reputable loan company to help you out with the process.
The basic requirements are the home’s construction plan, the home’s size, your desired materials, and the contractors who do the work.
On top of that, the lender needs to know if you can pay your monthly payments during construction. If the lender thinks your purchasing power can’t match the house you wish to build, you may have a problem qualifying.
Preparation of all requirements is the key!
First off, make sure you have an attractive credit score. You don’t want to be part of the statistics (30 percent) of people who feel more embarrassed to admit their credit score than their age or how much they weigh. Rather than just keep feeling bad about it, why not improve it?
Your credit is part of your life as a U.S. consumer, and the higher it is, the better your chances of securing future loans anyway.
To help raise your score, review your credit score report. Correct disputes if there are errors. Increase your credit limit and negotiate your debts.
You should also avoid paying your bills after the due date. Don’t forget to check your limits and set restrictions for yourself.
From here, you should strengthen your finances before building. This gives the construction costs a solid foothold in case any financial problems arise.
Final Thoughts: Why You Need to Know About Residential Construction Loans
It’s crucial to know about residential construction loans to maximize your purchasing power. You can have the dream house you like without depleting your savings account outright.
Though you might feel burdened to make monthly payments, this may pose a better option for you than paying the full amount.
For some people, a construction loan can help them have a house of their own without breaking the bank. A dream house is now a loan away.
Building a home is a stressful process, but with the help of financial experts, you’re in good hands. Contact us to find out more about our residential construction loan offers and terms.