Lucey Mortgage Corporation in Mount Pleasant, SC is here to help you build your new dream home. However, obtaining financing and navigating the mortgage process for new home construction can be challenging. This week, we are here to help you understand the essentials of this type of loan program. Read on to learn more about preparing for construction on a new home and the various loan programs available.
Types of Home Construction Loans
First, it is important to understand the different types of home construction loans. There are two primary types of financing:
1) Construction-to-Permanent Home Loans: With this type of loan, you initially borrow funds to help build the home. After the home is ready and you move in, the bank will convert the loan to a permanent mortgage. This may seem simpler since it is just one loan, and you may pay less closing fees. However, during construction, most people only pay interest on the loan. Luckily, many lenders will let you lock in on one mortgage rate, even at the beginning of construction. Your down payment can be set by the amount of the permanent mortgage. Typically, lenders like to see a 20% down payment.
2) Stand-Alone Construction Loans: As the name indicates, you will take out a loan only for the construction of the new home. Once the home is complete, you can get a mortgage that pays off the construction. With this type of loan, you may get away with a smaller down payment. However, you will have to pay closing fees with each new loan. In addition, once the construction is over, you still need to qualify for a mortgage—and you may not be able to lock in the rate that you desire.
Qualifying for a Home Construction Loan
In order to qualify for a home construction loan, you may undergo more scrutiny than you would with a mortgage for an older home. This is because there is not yet a home built as collateral for the new construction loan. You have to demonstrate you can afford all your monthly payments during construction: both payments for your contractors and for your current rent or mortgage.
Some lenders will ask for many details about the value you will get in the new home. In addition, while the home is being built, the lender will send inspectors to appraise the progress on your new home. You have to clear inspections in order to draw down on the loan amounts. This is why it is very important to have extra funds saved for unexpected costs while you build the home.
If you have additional questions about new home construction loans, Lucey Mortgage Corporation is here to help! Contact our Mount Pleasant, SC offices for more advice today!