Construction loans work differently than a standard mortgage. Since you don’t have a home to use as collateral, lenders look at other aspects to qualify you for the loan.
You’ll need a larger down payment, usually at least 20 percent, but sometimes more. Lenders also carefully evaluate the home plans, the builder’s reputation and history, and your financial qualifications (income, employment, assets).
If approved, lenders hold onto the funds and disburse them according to the draw agreement they created with the builder. The draws are dependent on the different phases. Each builder has different phases and disbursement requirements.
After each phase, the lender waits for a professional inspection, ensuring the work is satisfactory before disbursing funds for the next phase.
If you buy a fixer-upper or want to renovate a home you already own, you wrap the construction costs into your permanent mortgage, rather than a construction loan. You use the funds the same way (to renovate the home), but you make regular mortgage payments (principal and interest) on the full amount.
Just like the construction loan, lenders must approve the contractors and the home renovation plans. Contractors must have solid plans including costs of material and labor, along with an executed contract. An appraiser will determine the home’s after-repaired value, which the lender uses to determine your LTV, qualifications, and interest rate.
Once you decide you want to build a home, I’ll work closely with you to create the plans. We’ll start with a pre-approval – this lets you know how much you can afford and what qualifications you must meet.
Most importantly, you need to know how much money you must invest yourself. Like I said above, 20 – 30 percent is the norm, but each lender differs based on individual qualifications. Once you know what you can afford, you can start working with builders based on your ‘official’ budget.
I’ll also help you choose the right type of construction loan whether you want a single-close loan, getting everything done in one fell swoop or if you’d prefer to work it in steps and wait for the perfect loan and/or rates for your permanent mortgage.
Building your dream home in Colorado means having a reputable team on your side. Builders are a big piece of the puzzle, but your mortgage lender(s) is an important piece too. Everyone must work together to make the puzzle pieces fit together.
I’m happy to walk you through the complicated construction loan process, whether you want a single close loan or two closings. We’ll discuss your options, look at the total costs for both, and make an educated decision based on the factors you present and the state of the market when you apply. I look forward to helping make your dreams of homeownership come true.Contact For A Free Consultation