When it comes to building a home, people often have a lot of questions. To help bring some clarity to the construction loan process, I interviewed two experts from the First Alliance Credit Union Mortgage team, Jennifer and Al, live on Facebook! Even though there were audio issues during our session they shared some excellent information with me about construction loans, which I have recapped here for you.
What is a construction loan?
A construction loan is a temporary mortgage that is much like a line of credit and is used to finance the building of a home. Usually the first draw from the loan is used to pay for the lot you plan to build on and to get the title into your name. The next draws off the loans are for paying for the materials and labor to build your home.
How does a construction loan differ from a regular mortgage loan?
The biggest difference is what you’re making payments on during the life of the loan. A construction loan is usually interest only payments, meaning you are only making payments on the interest that accrues on the loan, not the actual amount that has been borrowed. A regular mortgage has full payments of principle, interest, taxes, and insurance. After the home is built, a regular mortgage is actually used to refinance the construction loan into permanent long term financing.
How long is the construction loan period? What does the timeline look like? Are there any important milestones to know about?
The construction loan period is usually up to 12 months. Just the preparation and processing time it takes to get to the construction loan signing is usually 60 days, but can be up to a year in some situations. It all depends on how long it takes to get the plans for the new home completed, bids and costs solidified. Main milestones to be aware of during the construction loan process are:
- Gathering of Total Costs
- Loan Approval
- Construction Loan Closing
Once the loan closes the home can begin to be built. Of course the most exciting step is adding the finishing touches and moving into your new home. Lastly, refinancing your construction loan into a long term fixed rate mortgage loan is the final step of the construction loan process.
What’s the process to get started with a construction loan? Who do you talk to first, builders, a realtor, the mortgage lender?
The process usually starts with a realtor helping you look at existing homes. If after exhausting all existing home options, you decide to build, you will start talking with builders. You can start with looking at spec homes that different builders have to help you get an idea of what you like and need. Once you find out a ballpark cost for building a home that meets your wants and needs, and it fits your budget. Then you will want to speak to a mortgage loan officer to get the process started for a construction loan and pre-approval.
Do you have to have a good credit score and high income to be eligible for a construction loan?
A good credit score is always important and it makes the process of obtaining any loan and the ability for approval much easier. The higher the income, the more house you are qualified to build and finance, just like with a regular mortgage. If your budget allows for a more modest home, then that is what you would discuss with the builder or realtor that you are working with. The most important thing you can do for yourself throughout the mortgage process, whether you’re buying or building is stick to your budget.
How does the process work once the house is built, do you have to pay on a regular mortgage too?
Once the home is built, and before you can officially move in you will need to have the “all clear” from the builder and the city or county authorities. Then you will want to talk to your mortgage lender and start the process for refinancing the short term construction loan into a long term fixed rate mortgage. Once that process is complete you will make payments to only the regular mortgage.
Jennifer and Al definitely know a lot about construction loans and are an excellent resource for getting your questions answered. If you are considering building your next home the best thing you can do for yourself is become educated on the construction loan process, understand the do’s and don’ts, and ask lots of questions. If you want more information about the construction loan process I encourage you to download this easy to follow guide or get in contact with us! There is never any question too big or too small for our team to answer.