Finding your Charlotte, NC dream home can sometimes be a long process. After a day of house hunting, you usually end up wanting specific details from different homes and can't seem to get the perfect fit you're looking for. Fortunately, you can use construction loans to fund restoration projects and the construction of new residences. Choosing to build your own home can be the best option to have all the design ideas in mind.
To get a construction loan in Charlotte, NC, you must have a good credit rating and a good down payment. There are also other qualification requirements that you must acquire.
The process of getting a house construction loan is identical to obtaining a traditional mortgage, except that the lender will also insist on approving the builder. Here's everything you need to know about getting a home construction loan.
What Is a Construction Loan?
A construction loan is a loan used to construct houses, offices, or other real estate projects. Most construction loans are given to builders or property developers to help them finance a large construction project like a home complex, office building, or shopping center.
In particular, a construction loan is a short-term loan intended to fund the construction of a home or property. Before getting financing, the builder or home buyer takes out a construction loan to pay the project's costs. However, construction loans offer higher interest rates than regular mortgage loans since they are riskier.
They may, however, be given to an individual to help finance the construction of a residential house. Such loans have distinct characteristics, such as the length of the loan period and the method of disbursement of loan funds to the borrower.
Is It Easy to Get Approved for a Construction Loan?
It is more challenging to qualify for construction loans than for traditional purchase loans. Because the home hasn't been built yet, lenders consider these loans to be higher risk.
Do You Make Monthly Payments on a Construction Loan?
You don’t need to make monthly payments on a construction loan. You only need to make interest payments on a construction loan until the construction is completed.
The original loan balance is only repaid once the house is finished. These loans are paid the same way as a traditional mortgage, with monthly payments based on an amortization schedule.
How Is a Construction Loan Valued?
For construction loans, the security value is calculated using the land value and construction costs as if the project had been completed (i.e. on completion valuation). The builder's fixed price tender specifies the building expenses.
How Long Does It Take To Get Approved for a Construction Loan?
Expect construction loans to take a few weeks longer than a conventional mortgage approval (7-10 days) due to the plans, specs, and contracts must be evaluated before they can get granted.
What Is the Average Interest Rate on a Construction Loan?
Construction loans typically have an interest rate of 4.5 percent, depending on the lender. This is around 1% more than the average rate for mortgage loans.
What Are the Qualification Requirements for Construction Loans?
Getting a construction loan instead of a regular mortgage may be a more challenging hurdle for borrowers. This is because, unlike a typical mortgage, the loan has no collateral — the house hasn't been built yet.
Construction loans are "risky in the perspective of a lender," according to the report. This implies that qualifying for a loan may be more challenging, and your interest rate may be greater than on a conventional loan.
The following are common requirements for a house building loan:
1. A Good Credit Rating
For conventional loans, you may need a credit score of 700, while specific lenders may have more lenient requirements. Credit score criteria may be less strict for loans through the Federal Housing Administration, Department of Veterans Affairs, and Department of Agriculture.
2. A Licensed Builder With a Good Reputation
Your lender will verify that the builder is trustworthy enough to pay suppliers and complete the project. Your builder will be required to provide professional licenses, proof of insurance, and vendor references outlining payment history as part of the verification process. The lender will also examine the builder's credit rating and financial status.
3. A Good Down Payment
Depending on the loan type, you'll need a different amount of money for a down payment. A standard mortgage may allow for a 5% down payment, but a construction loan may require at least a 20% down payment.
You should inquire about how to receive a construction loan with no money down from your lender. FHA loans have low down payments as low as 3.5 percent, and USDA and VA loans may not require a down payment.
What Are the Types of Construction Loans?
Here are the types of construction loans that you must know:
1. Construction-To-Permanent Loan
This type of loan is best for homeowners who wish to save money on closing fees and housing mortgage funding. This loan is used to fund the construction of a home and then changes to a fixed-rate mortgage after construction is finished.
2. Construction-Only Loan
This loan is appropriate for people who have a lot of cash on hand or plan to pay off their construction loan when they sell their previous house.
The lender issues a short-term, adjustable-rate loan to complete the construction of a property. The loan must be paid off in full or refinanced into a mortgage after the building is completed. This necessitates the completion of two application processes and two closings.
3. Owner-Builder Loan
This loan is suitable for homeowners who have prior construction experience and want to be their general contractor.
Owners with experience as a home builder, or a contractor's, license are usually the only ones who qualify for these loans.
4. Renovation Loan
Finally, this financing is ideal for homeowners who are purchasing a fixer-upper intending to make significant modifications. The home's expected worth determines the loan amount following renovations.
What Can Be Included in a Construction Loan?
A construction loan may include payment for the land, contractor labor, building materials, and permits, among other things.
While house furnishings are typically not covered by a construction loan, permanent fixtures include appliances and landscaping.
Construction loans are an excellent option to fund projects if you do not want to take out a mortgage. When signing this kind of loan arrangement, the borrower must understand what they're putting themselves into and how much risk they're taking on.
Remember to consult a professional before embarking on your building project!
You can contact the best real estate agent in Charlotte, NC, Nancy Braun of Showcase Realty, for more information on construction, mortgage loans, or Land for Sale in Charlotte, NC.
Nancy Braun of Showcase Realty can assist you in reaching your real estate goals! Call us today at (704) 997-3794 to discuss your choices!