Some people apply for a loan to secure funding that they can use in building their dream home. Little did they know that they won’t be getting a traditional mortgage. Instead, they will likely receive a loan for construction. It may be a new lingo. But it is something that can easily be understood. On this primer, I will be discussing every essential thing that you need to know about construction loan and partially, on construction to permanent loan texas.
Defining Construction Loans
Construction loans are used to cover the expenses of building or improving your home. The credits usually entail a higher interest and are considered as short-term. That is because they are based on the projected value of the property once the works have been completed. On the other hand, a traditional home loan is based on the fair market value of the house and determined by its condition relative to other latest sales.
There are three major types of construction loans which you may avail. These are:
1. Construction-to-permanent loans.
It’s best to apply for this type of loan if you already have defined construction plans and timelines. Through this loan, the selected bank will pay the builder/contractor as the work is being finished. The cost is then converted to a mortgage at closing. This type lets you have steady payments by locking interest rates at closing.
2. Construction-only loans.
It demands full payment once the construction is complete. That is why make sure that you have sufficient cash to work. Or, you should be confident that the returns from the sale of your current home will sustain another project. By the way, you will need to personally search for a lender if you need a mortgage to augment the cost.
3. Renovation construction Loans.
You only use this if you need a fixer-upper. Good thing, there are available government programs which you can avail. The projected expenses of any renovations you wish to apply for your home is covered up in the mortgage, including the purchase price.
How Construction Loans Work
Unlike traditional loans, construction loans are paid by installments. The chosen bank will pay the builder until the project is complete and will then transfer the payment.
The installments are referred to as “draws.” Before each draw, the estimated cost of the present phase of the home is inspected. The bank will also monitor if the builder is complying with the given timeline of the project. If verified, the costs of the builder will be reimbursed per draw.
What are the Advantages of Construction Loans?
Although quite pricy, construction loans do offer some distinct benefits. Among them are:
- The loan applicant is only required to pay lower, and interest-only during the construction.
- The terms are flexible.
- There is structure because of added scrutiny.
What are the Downsides of Construction Loans?
Just like any loan, construction loans, including construction to permanent loan texas come at some disadvantages. It is essential to consider these before filing your application. Among them are:
- It’s harder to qualify for construction loans.
- The interest rates are higher.
- There is risk associated with short-term loans.