Those interested in buying a home know that a mortgage may be involved. But what about if you plan to build your new home? The majority of us can't afford the costs of building a new home outright, and getting a mortgage for a home that doesn't technically exist yet can be a difficult process. This is where a construction loan comes in.
"A construction loan is a short-term loan that you can use to front the cost of building your home," says
Michael Litzner,
Broker of
Century 21 American Homes. "These loans are set for a specific length of time, typically around one year."
When construction on your home is complete, the homeowner then refinances by applying for a new loan to pay off the initial construction loan. "These second loans are called 'end loans,'"
Litzner explains.
While construction loans are helpful, they can be difficult to get. Below are some of the strict qualifying requirements that must be met before you can be considered.
A Large Down Payment – Construction loans require a much larger down payment than a traditional loan. The cost can fall anywhere between 20 and 25 percent. "Down payments are particularly high with building loans because your lender wants to see that you have some skin in the game,"
Litzner notes. "They want to know you won't walk away if things head south."
The Right Builder. In order to receive a construction loan, you need to have a licensed general contractor on board. "If you're planning on doing the building yourself, you will run into problems," says Litzner. A qualified builder provides you with the reputation that allows the lender to have confidence in your project.
Details. "Before you can be approved for a construction loan, you will need to supply the lender with a ton of details, from floor plans to what type of insulation you plan on installing," states
Litzner. "Talk to your builder and plan out as much of the home building process as you possibly can. This will also allow you to be more organized when it comes time to build."
An Appraised Home Value. Before you can build, you need to get your future home appraised. "This may seem ridiculous-your home doesn't even exist yet!-but your lender needs to know the future value of your home before they will lend you the funds to build it,"
Litzner says. They don't want to lend you more than the home will be worth in the long run.
For more information on home loans, please contact Century 21 American Homes at 1-800-270-6318. To view available new construction properties "Click Here".
Century 21 American Homes is one of the fastest growing real estate brokerages serving Long Island, Queens and Brooklyn. To find out more about an exciting career in real estate contact us at careers@c21amhomes.com.