Many people dream of having their homes built from the ground up. After all, there’s nothing better than having your home custom-built to suit your needs. However, there’s also the matter of financing to worry about. Most homeowners think of getting a home loan for this, but this is a common misconception because they should get a construction loan.
A construction loan is precisely what it sounds like: a loan used to pay for the building or construction of the property in question, which is why it is also referred to as “hard money” or “construction funding.” Unlike a home loan, it’s not for buying the property itself but for the actual construction. It’s a longer-term loan, usually for up to five years, but can be longer depending on the borrower’s preferences.
This article will discuss everything there is to know about construction loans. Read on below to get started.
How Construction Loans Work
Construction loans are pretty much the same as home loans, except that you’re borrowing money for building a property instead of buying it. The fund you get will be a larger amount because of the higher value of the property you’ll be constructing.
The lender will assess your property value, and then they’ll determine the amount they’re willing to lend to you. Just like a home loan, your credit score will determine your loan-to-value ratio, which is essential when assessing whether you’ll be able to pay them back or not.
However, if you’re building your own property, this is much easier because you won’t have to worry about getting a second mortgage on it. A construction loan is merely a specific type of home loan.
How to Get a Construction Loan
Getting a construction loan is easier than you think. All you need to do is to acquire your construction loan application. This is an application form that the borrower must fill out.
Once you have acquired the application, you need to send the form to your chosen lender. The majority of lenders will require the following documents:
- Proof of insurance
- Proof of identification
- Proof of income
- Proof of prior residence
If you’re building your own home and don’t have any loans, you can get a construction loan without any information, which is much easier to get approved. If you have a high credit score, getting a construction loan will be even easier.
Calculating the Size of Your Construction Loan
Whether you’re getting a construction loan for your own home or building a property from scratch, the process is pretty much the same. Before you get a construction loan, you’ll need to determine the loan size that you’ll need.
However, you must also consider the cost of your property. You’ll need to borrow a fraction of its overall price, which is known as the loan-to-value ratio. For example, let’s say that your property costs $250,000. If you decide to borrow $50,000, your loan-to-value ratio would then be 20%, which is a typical percentage of the value of a home.
Some people, though, choose to get a larger loan than the value of the property. This is because they want to be able to make some upgrades to the property while they are building it. This is known as hard money and will usually get you a higher loan-to-value ratio than the home loan.
Should You Get a Home Loan or a Construction Loan?
You may wonder whether you should get a home loan or a construction loan. Both types of loans are used to buy property, so it can be a bit confusing.
If you get a home loan, you’ll get a longer time to pay them back, which means you could also use the money you borrow to pay for your home in advance. On the other hand, you’ll probably need construction loans if you’re building your own home. It all depends on your circumstances and needs, so this warrants a wise decision.
Construction loans are a great way to get the funds you need to build your property. While they are like home loans, they are much more flexible, so they’re a better option for people who develop their property.
If you’re looking for a mortgage company in Utah, Clayson Mortgage is the one for you! We offer comprehensive loan programs to help you be one step closer to whatever you’re after, be it a home or a car, for affordable rates. Reach out today and see how we can help!