The busted economy is swinging back, presidents new tax bill is looking cool, and property market is attractive after the historical housing bubble. And amidst such seemingly favorable conditions thinking about building a new home sounds like million dollar idea, and it is going to cost you millions of dollars too. Hang on, do not go by the statistics or feel jubilant about the prospect. The fact of the matter is, do you have the money to pay upfront? Boom, this is where your personal economy crashes.
This is the problem with the lot; in fact, except filthy riches, hardly anyone could afford to construct the building by paying huge sum of the money. And that does not mean that you should not dream or venture into building homes, but you need to approach it differently. Of course, you can construct home, but you need construction loans to materialize your idea and bring it into reality.
This article aims to guide you through the complete process of acquiring construction loans easily without hassle. While some consider it as a nerve-wracking affair, quite a few people find it daunting, and it is so because of various intangible factors.
What’s a construction loan?
A construction loan is an interim loan given to carry out the building of the home. The loan term could range from a year to more than two years. Essentially, the loan term lasts until the construction of the home gets over. And after the completion of the loan, you have to pay off the loan by acquiring a fresh loan generally known as “end loan” that means you have to refinance the property.
How to get the construction loan?
Often the lenders and banks shy away from construction loan because they have to give you money for something that does not exist. If things go wrong, or the value of the property sinks, then it will be considered as a bad investment, to avoid such situations, banks and lenders have placed stringent eligibility criteria and loan sanction process. Below mentioned are the provisions and you must act accordingly to avail the loan.
- Get A Qualified Builder: Generally, lenders trust the experience of the builder, since the house is yet to be built and the future is unpredictable, banks trust the expertise and experience of the licensed contractors. If you look out avail loan without a certified and renowned contractor, you might find it difficult to get through the process and get the loan.
- Provide Detailed Specifications: before you approach the bank, chalk out the construction plan that includes floor plans, materials to be used, the height of the ceiling, the insulation materials and other nitty-gritty of the construction process. Ask the builder to give you the “blue book” that contains details of the construction plan.
- Appraisal. Although it is daunting and tricky to appraise something non-existent, the bank should have an appraiser considering the value of the land on which the proposed building is supposed to be built, the specifications of the plan. After calculating the value, the calculation is weighed against similar property in the same location generally termed as “comp”. And the appraised value will be determined based on the valuation of the comp.
- Arrange Down Payment: You have to pay 20 % of the loan amount as down payment; this is to ensure that you are serious about the construction, and if things go wrong, you just cannot turn your back and walk off. This also works as a protective shield if the constructed building turns out to be lesser than expected value.
How does it work?
The bank does not pay the entire amount upfront; in fact, it schedules the payment through the process known as “draw”. Initially, the bank releases 10% of the loan amount, later as the construction process proceeds; the bank pays out rest of the amount in multiple installments. Generally, the first payout comes out of your down payment amount.
Risk mitigation: The construction loan might sound like luring, but it involves substantial risks too. And you need to consider few important aspects and remain mindful during the construction phase.
- Make sure that the construction work goes according to the plan and gets over at the scheduled time. In case of delays, you might end up in pay extra fee to extend the loan until you finish the construction of the building and get it refinanced to avail the “end loan”.
- You must keep extra cash with you for urgent and unwanted situations like the builder does a ridiculously poor job or the housing market dips which is very likely. Apparently, you have to get the end loan to get out of the construction loan, and additional money will come handy in this sort of scene.
- You should be able to cope with drastic situations where you fail to qualify for the end loan for reasons like a sudden drop in income or bad credit scores. Since the construction loan is a balloon mortgage, you have to pay the interest during the construction with the balance amount scheduled to be paid at the end of the term with help of end loan. And if such cases arise where you do not qualify for the end loan, you could end up losing your home to foreclosure. Hence, it is advisable to remain aware of potential threats and disadvantages of the construction loan.
Home building has always been a tiresome and complicated process, by understanding the complexities of the process; you are likely to handle the complete construction course easily and effectively. So, if you have been planning to capitalize on the current conducive economic climate, you should consider construction loans, but it should be a thoughtful approach, not a mindless or impulsive action.
Lastly, it is important to own a home, and you must possess a living space where you live, love, sing, and dance and celebrate life with your loved ones because it is as important as the dump truck bodies to the trucks. And this seems to be the perfect time to materialize your dream of owning a beautiful home.
Author Bio: Mario Rolls is the blog consultant and writer at Dump Trucks. He brings 20 years of experience in various industries including heavy vehicle blogging and dump body manufacturing business. He is working for a company in Mississippi and one of the Nation’s primary manufacturers of dump truck bodies and trailers