A great option for those who have little available savings for a down payment.
What is a Construction Loan?
A construction loan is when a borrower takes out a short-term loan to cover custom home building costs. It’s perfect for those who want to be involved in every step, from choosing materials to designing rooms on paper. Once construction is finished, owners have to apply for mortgages to pay off their new house.
When it comes to home-building loans, you have a lot of different options. You can start from the ground up with your plot of land and build the house yourself or buy an existing building that needs major renovations. Either way, there are plenty of financing possibilities available, so be sure to shop around before taking out any type of loan!
This type of loan is short-term and usually covers one year of the actual construction period. Many lenders opt-out of offering this type of loan because with so many variables like builder’s cooperation, getting approvals from local municipalities, these become higher-risk loans, making them difficult for a lender to handle without risking their own money.
If this sounds like the right way to go, be prepared because it will cost more than traditional loans and income qualifications are stricter with these types of loans. There will also likely be higher interest rates on top. You’ll also have to pay extra fees when applying for another mortgage after taking out this type of loan, which can add up quickly.
Similar to construction-only loans, these are one-time deals that fund the building and then convert into permanent mortgages during the build phase – which means interest is paid on borrowed funds without having any burden of paying off principal while under this type of loan’s umbrella. Construction-To-Permanent loans are a popular choice for those looking to consolidate and build up their credit. But, these loans can be much more expensive than the traditional mortgage, so you must do your research before going this route!
Renovation loans, also known as 203(k) loans, can be used to purchase your new home and remodel the space you already own. The Federal Housing Administration (FHA) insured this type of loan, so some lenders don’t offer this option to their customers.
If you are a conventional loan borrower, Fannie Mae and Freddie Mac have loans just for you. Known as HomeStyle Renovation or CHOICE Renovation, respectively, these low-interest-rate mortgages will help homeowners tackle home improvement projects with ease.
These powerful institutions offer very competitive rates that can be applied to your mortgage balance without affecting the monthly payment amount in any way! The more improvements made on a given property using this type of mortgage transfer strategy, the lower interest rate becomes due every month alongside an increasing credit score which is always beneficial when it comes time to buy again.