Are you interested in obtaining a construction loan for building or improving a home? Use this calculator to quickly determine what type of loan you might qualify for and what you can anticipate the monthly payments to be on an initial interest-only loan. It also allows you to calculate the conversion of the loan from construction to a typical conforming mortgage which amortizes & determine the monthly principal & interest payments on that portion of the loan as well. Select if the transaction is a purchase or refinance, the price of the property, the cost of construction, the duration of the project, the estimated home value when the project is complete, and the estimated interest rate on the loan. The calculator will then show graphical & numerical representations of IO and amortizing payments. Click on the 'View Report' button to view a more detailed breakdown.
Here is a table listing current conforming mortgage rates in your area, which you can use to compare against other loan options.
To build a new house is a dream shared by many Americans. Many people might never act on it, while many others certainly will: finding ways to save and plan, and one day build the home they always wanted.
The good news is that if you are looking for help in achieving a similar dream, there are programs and loans that are ready to help you. The complication is that real estate construction loans are more complicated than a normal loan, so you have to do a little more legwork.
This article will help you to understand some of the basics about new construction real estate loans so that you can one day also claim your own part of the American dream.
Before delving into the specifics of loan types and how they might work for you, there are some commonalities shared by all real estate construction loans, including:
Most often, construction loans are short-term loans (one year or less) that turn into a longer, more conventional mortgage when building is complete. The larger part is usually 15 or 30 years.
With a construction loan secured, you will receive installment payments for that first year of building. They are on a predetermined draw schedule to cover the costs of building. You will make interest-only payments during the building period, typically based on a variable rate.
Expect your lender to check-in every time before disbursing draw-period funds, to make sure the project is adhering to the schedule pre-approved by you, the builder and the lender. Everything works off schedules and milestones that you had clearly set out to the lender to secure financing.
How the loan works more specifically depends on the type on loan you secure, and who you secure it with.
There are two types of real estate construction loan: a stand-alone construction loan, and a construction-to-permanent loan. Though sharing the commonalities already mentioned, they differ in the benefits they could present to you, as a borrower.
One benefit of the stand-alone loan is for people who already own a property and may be looking to sell it when their build is completed. The stand-alone would allow this borrower to put more money down once they sell their existing home – which they could not do with the other loan type.
The stand-alone could also help people who have less money up-front to get into their property, because they could use the finished home as collateral to secure a better rate for the mortgage.
Another strategy is to look to the government for any existing programs that might be applicable to your situation.
The US Department of Housing and Urban Development (HUD) uses FHA loans to help more buyers find homes. Boasting low down payments and closing costs with easy credit qualifying, these loans can bring opportunity to a wider range of applicants. These traits hold true in FHA real estate construction loans.
FHA construction loans are construction-to-permanent, meaning only one closing. Key benefits of this loan, compared to one you would secure at a bank, include:
An FHA construction loan will have a few more stipulations as well, such as land ownership involved in the deal. If you owned the land for more than six months, you cannot qualify for this loan.
Your city will also need to provide a certificate of occupancy following a detailed inspection of the property after the building period. 60 days after this is issued, your loan begins amortizing.
US military veterans might have additional options to consider. Though the VA does not itself offer any loans, some qualified VA lenders will offer VA construction loans.
The good news is that qualifying for them uses the same criteria as any VA home loan. The challenge, however, is in finding a VA lender who offers them: they are often considered too risky, so they are not common in the marketplace.
Once you do find a VA construction loan provider, you are going to need to adhere to a very strict set of guidelines and rules about the property and the finished building to meet VA regulations and property requirements. They take an average of 45-60 days to close, which is a long time for any type of mortgage.
The benefits of the VA construction loan, which is a construction-to-permanent type, include:
The real challenge in securing a VA construction loan, is finding a lender and a builder who are both comfortable with the deal. The risks, extra paperwork and delays involved make these loans more of a true rarity in the current marketplace…but veterans can certainly benefit from the extra efforts made to find and secure them.
If building your own home is a dream held, you should be happy that there are loan programs designed specifically to help you achieve that goal.
You should expect to put in some extra footwork to find a lender offering your loan, as well as saving for a larger down payment typically required. You’ll want to be building your credit score too, as it will play a larger role in your qualification.
If you are not a licensed contractor yourself, you will want to find a builder to work with who understands your funding needs. You will need plans and schedules to submit for funding, and you will have multiple checkpoints during construction to keep everything on-track.
You will receive money during the draw period, during which you are paying only interest on your loan. Following the build, you will have a 15- or 30-year mortgage at a fixed rate and pay either one or two sets of closing costs to get there, depending on your loan type.
As you can see, despite their complexity, construction real estate loans do provide opportunity and potential for many prospective homebuyers. While they may not be as popular and common as other types of mortgages, they can certainly be the key in helping you achieve your own dream home.
US 10-year Treasury rates have recently fallen to all-time record lows due to the spread of coronavirus driving a risk off sentiment, with other financial rates falling in tandem. Homeowners who buy or refinance at today's low rates may benefit from recent rate volatility.
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