If you’re thinking of starting a construction project, you may be wondering how hard it is to get a construction loan. The answer may surprise you.
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What is a construction loan?
A construction loan is a short-term loan—usually about a year—used to fund the construction of your home, from breaking ground to moving in. With a BB&T construction-to-permanent loan, your construction financing simply converts to a permanent mortgage when your home is complete.
During construction, you only pay the interest on your loan, and your payments may be tax-deductible. Consult your tax advisor for information about tax deductions for interest paid on your construction loan.
How do construction loans work?
Construction loans are a bit more complicated than conventional mortgage loans because you are borrowing money for a property that does not yet exist. There are two types of construction loans: a construction-to-permanent loan and a standalone construction loan.
With this type of loan, you borrow money to pay for the cost of building the property, and once it is complete, the loan converts into a mortgage. This is generally the most popular type of construction loan because it allows you to lock in a low interest rate from the beginning.
Standalone construction loans:
This type of loan is exactly what it sounds like — you borrow money, interest accrues, and once the project is complete, you pay off the loan. Because these loans are shorter term, they usually have higher interest rates.
How difficult is it to qualify for a construction loan?
The difficulty of qualifying for a construction loan is higher than qualifying for a traditional mortgage because lenders perceive more risk in financing a property during the construction phase. Construction loans are made by banks, credit unions and online lenders. The interest rate charged on a construction loan is typically higher than the rate that would be charged on a permanent mortgage, because there is more risk involved for the lender.
There are a few things that borrowers can do to improve their chances of qualifying for a construction loan:
-Save up a larger down payment: A larger down payment shows the lender that you have skin in the game and are more likely to make timely payments on the loan.
-Have strong credit: You will need to have strong credit in order to qualify for a construction loan. Be sure to check your credit score before you apply.
-Show proof of income: Lenders will want to see proof of your income in order to determine whether or not you can afford the loan payments. Be sure to have your tax returns and pay stubs ready to go when you apply for the loan.
-Find a reputable lender: It’s important to find a reputable lender who has experience with construction loans and can offer you competitive interest rates.
What are the benefits of a construction loan?
Construction loans are a bit more complicated than conventional mortgage loans because you are borrowing money for a property that does not yet exist. The lender will want to know your plans for the property and will base the loan on the value of the finished product. Construction loans can be used for new home construction, home additions and renovations.
There are several benefits to taking out a construction loan:
-You can finance both the land and the construction of your home with one loan.
-You only pay interest on the amount of money you have borrowed, rather than the full value of the property.
-Construction loans typically have shorter terms than conventional mortgages, so you can get into your new home faster.
-Construction loans can be easier to qualify for than other types of loans because you are borrowing against the value of the finished product rather than the value of your current property.
Are there any drawbacks to a construction loan?
There are a few potential drawbacks to securing a construction loan. One is that they can be more expensive than traditional loans. This is because construction loans are typically interest-only loans, meaning that you only have to pay the interest on the loan during the construction period. Once construction is complete, you then have to begin paying off the entire loan amount. Construction loans also typically have a shorter term than traditional loans (12 months versus 30 years), so you may end up paying more in interest over the life of the loan.