You are really determined to see your custom house project materialized and you have already made the decision to subsidize the action through a construction loan. However, you must be aware of the fact that getting such a sum of money is not so simple.
There are several types and you need to get minutely acquainted with each of them in order to choose the best solution. The content of the article will therefore revolve around your construction loan options.
In your attempt to borrow money for the building of your custom house, you need to discard everything that you know about regular home purchase mortgages and start from scratch. Differing from the loans used to buy existing houses in terms of structure and pricing, the ones granted for construction plans require solid experience and few are the firms that specialize in this type.
Consequently, you first have to document yourself as much as possible before resorting to a loan officer in order to distinguish an experienced individual from an amateur.
The more thorough and minuter your research is, the better, because you thus have the chance to discover unclear aspects to be disambiguated with your loan officer. Don’t hesitate to ask questions several times until you are sure you have understood. Moreover, it would be a good idea to find someone who has personally funded at least 50 such acts throughout his or her career.
A construction loan differs from conventional mortgages or land loans in that the financial institution which grants it doesn’t lend the entire sum at once. Instead, the cash is handed out in several installments depending on the progress of the construction work. Banks apply this system because it is riskier to take back a house and sell it if the debtor stops paying them and the home is incomplete.
Another aspect typical to construction lending resides in that there is little standardization in this area, so don’t put yourself to the rack if you don’t find two similar construction loan programs. The general trend is for banks to contrive their own products to suit their particular short-term cash needs. Construction loans are funded through money that small and large banks alike borrow on giant credit lines. In some cases – more often with local banks- portions of the depositor base are used to finance such construction loans. Since they are granted for a relatively short term, the creditors no longer need to sell the construction loans to a third party (as it is usually performed in the case of long-term mortgage loans). This leads to the exclusion of standard programs.
Types of Construction Loans
Although “uniformity” isn’t quite a defining feature of construction lending, there are nevertheless some constant characteristics, such as the fact that the related construction loans can be divided into two categories: all in one (or single-close) loans and construction-only (also called double-close) loans.
The former kind, also known as Construction/Permanent (CP), One-Time-Close (OTC), and Construction-To-Permanent (CTP), gives customers a great sum upfront, paving the way to a profitable long-term mortgage. The all-in-one deal is defined by the following features:
- it usually requires no re-qualification or re-appraisal in order to be granted; the applicants have only to finish the construction and they receive a permanent construction loan without any questions asked;
- it opens a wide range of popular permanent construction loan programs from which to choose;
- in some cases, the lenders offer a series of options that enable the borrower to enjoy locking interest rates before the house is finished;
- the borrower may receive the permission to buy land as part of the process on the condition to have all the necessary construction documentation ready before funding the construction loan.
Single-close loans are usually very convenient for first-time custom home consumers.
The latter type preceded the single-close loan and consists of the bank providing a short-term construction loan only for the construction time period. Once the building project is completed, the borrower has to arrange for a permanent financing. This means starting all over again with the formalities of applying and qualifying for another construction loan. However, things might get simplified if your bank has you pre-qualified for a permanent loan before it grants the construction loan.
Compared to the former type, the double-close loan features several drawbacks, namely:
- it runs the risk of being more expensive because the applicant has to pay for two loans and all the fees and costs that go with them;
- it can undergo changes during the period in which the house is built and the customers have no assurance that they will still qualify for a permanent loan when the construction project is finished;
- it is based on the policy according to which the permanent loan qualification or getting an unaffordable construction loan are the customer’s problems.
Qualifying for a Construction Loan
As a sort of general rule, people who fully document sufficient income for qualification with tax returns and pay stubs are likely to benefit from the best construction loan programs. In case you don’t get this chance, then resorting to a no-income-qualifier program is the next option.
Usually designated by means of terms like EZ Qualifier, Quick Qual, No Qual, No Income Qualifier, Reduced Doc, No Doc, this type of construction loan program is not necessarily easier than the full-documentation ones. By comparison, it actually requires better credit and takes just as long to approve. There are four main subtypes:
- Stated income, verified asset – the customers have to state their income and verify all the assets that comply with the lender’s requirements;
- Stated income, stated asset – very convenient for people with variable income or who are self-employed, this type of construction loans implies that customers state their income and assets without any further documentation;
- No-stated income, verified asset – the income is not stated on the application, but documentation on the assets has to be provided;
- No-stated income, no-stated asset – although it involves the simple stating of one’s name and Social Security number, it requires a great credit and costs more.
As for the persons who want a custom house but have bad credits or properties that fail to meet bank guidelines for getting a construction loan, they don’t have other options than resorting to a nontraditional lending source or using private or hard money.