You are finally ready to buy your dream home! You found the perfect lot, in the perfect neighborhood. All that is standing between you and the house is the mortgage process. Have you met with a lender and considered all of your different options regarding new construction loans? Do you know what to look for, red flags, and different things that may happen in this process? Here are 10 things to know when you are looking to get a loan.
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Know the Different Types of Loans
Understand that there are 3 main types of construction loans. One-time close, construction only, and renovation construction loans. One-time close allows you to bundle your construction and mortgage costs together. This allows you to lock in your rates at closing. Construction only covers only the cost of the construction and must be paid in full when that part is done. Renovation loans typically get folded into the mortgage when the construction is completed.
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It May Be Difficult to Qualify for a Construction Loan
When you take on this type of loan, the lender is taking on more risk. Because it is based on the assumed value, the numbers can be off, and it is not always as detailed and specific as it needs to be. If the borrower cannot make payments, then it falls again on the lender.
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The Lender Does Not Always Offer This Option
Because they assume more risk, you may not even know that this is an option. If you are a responsible candidate, make sure you know about this option. It could really help you financially in the long run. Just be aware that lenders who don’t bring it up typically do not want to deal with any difficulties.
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Lenders May Need Proof of Payments
Be prepared to show your credit score, debt-to-income ratio, make a down payment, and go over different repayment options. There may be new things that come up that you will have to pay for so be ready to prove to your lender that you can do so.
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Any Financial Change in Your Life Can Affect Approval
If you are planning to get a new job anytime soon, keep in mind that this could have a direct effect to your mortgage getting approved. Lenders will usually be upfront about this, but you if have any major financial change, this could affect the process.
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Sometimes Construction Goes Wrong
Building a house can be complicated. Construction deals with materials, weather, and other outside factors that can cause issues. Basically, expect the unexpected and know that there may be extra costs you were not planning on having.
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Get Everything in Writing!
This may seem like common sense but because so many things change and so much is up in the air, it is so important to get every detail down on paper; especially for the what-ifs that may happen.
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Home Inspections are Important
Make sure that whoever is inspecting your home, knows what they are doing. Remember, you are the one who is paying for all this in the long run. Make sure you do not sign off on anything until everything passes inspection and you are satisfied.
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Know the Timeline
You should know that a typical process for this type of loan could take weeks. There is so much that goes into it and many different aspects that must be checked.
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Understand Closing Costs
During closing costs, you will go through additional credit check, and processing fees. You may also have to deal with attorney fees and home inspection costs.
There is so much that goes into a construction loan. From specific costs to lender policies, you may be running an uphill battle at times. If, however things go smoothly and you have a great lender on your side, this could really benefit you financially. Check with different lenders to see what loan would fit you best.