Top 10 Construction Loans In 2020

The idea of building a home, sinking a swimming pool or pursuing significant structural adjustments to your property is all exciting until you factor in the costs. Most people cannot afford to build a new home or pay for major structural improvements.

Enter a special type of funding – the construction loan. This refers to a short term loan advanced to individuals seeking to custom-build their homes or carry out capital intensive property improvements.  It differs from the conventional mortgage in the sense that it is short term, attracts higher interest rates – as most lenders consider it risky – and the amounts advanced can be used to cover not just the home building costs  but virtually every other cost relating to the construction and property improvement.

Also, see how you can easily qualify for a loan even with a bad credit score 

Top constructions loans for 2020: Summary

How does it work?

Construction loans are short-term, with their repayment periods extending to no more than 12 months.

To qualify for a construction loan, you must either have the backing of a qualified builder or be a qualified developer yourself – in which case it would be best if you applied for the owner-builder construction loan. Note, however, that in either case you will be required to furnish the lender with the construction “blue book,” which comprehensively details the estimated construction costs and workflow.

Understand that the loan has to be repaid within the stipulated time. Most lenders have nonetheless, adopted these three flexible repayment options. The first, and the most popular, involves repaying the loan in equal monthly installments. The second involves paying the loan’s monthly interest during the construction period and settling the balance in lump sum upon completion. Thirdly, you can chose to apply for the “End Loan” and use it to clear the construction loan. The end loan in this context refers to a special loan that can be easily converted into a medium- to a long-term fixed-rate mortgage.

Why should you take a construction loan?

I. Capital for home investment

A construction loan gives you the much-needed capital to build a home or real estate project. Just like conventional mortgages, construction loans are ideal if you are looking to become a homeowner, but have no capital to purchase your own house. The loan will cover all the project costs  and most even have the option of converting the loan into a mortgage later.

II. Build your customized home

A construction loan gives you the rare opportunity to build a house from the ground up. You can work with a builder of your choice or even make it yourself. These loans give you the freedom to design and build a unique home that captures your family’s needs.

III. Fund your commercial construction project

Construction loans can fund your commercial property and projects. If you are in the construction business, these loans can be used to invest in equipment, labor, or any other costs involved in a real estate project. And since you have the refinancing option, you can setup the real estate property using the loan and easily convert it to a long-term repayment plan.

Here is a list of what we consider the Best Homeowner loans in 2020

What are the pros and cons of taking a construction loan?

Selection criteria

• Loan products and terms
• Loan application process and waiting time
• Minimum qualification requirements
• Customer service
• Interest rate
• Draw schedule
• Complaints and Reviews

Top 10 constructions loans for 2020

What to consider when choosing a construction loan

There are various things to consider before and after applying for a construction loan. These loans are not ideal for everyone, and there is no one-fit-for all. Some of the areas to give priority include:

I. Credit score

Qualifying for a construction loan can be tough if you have a limited credit history. You should, therefore, consider developing a consistent history and a good rating before applying for such loans. It is also essential to watch and continue building your credit after successfully applying for a construction loan. This will increase your likelihood of qualifying for the end loan, which is very critical in facilitating the refinancing of your credit into a long-term mortgage.

II. Loan terms and policies

Different lenders impose different conditions on their loan products. You should carefully read all the terms and clauses in the loaning agreement to ensure you are well informed on all aspects. You can also compare various offers from local lenders in your area to find those with better loans and repayment terms. If you do not understand any part of the contract, ask the lender for clarity, or engage a professional attorney or real estate broker.

III. Builder vs. owner-builder

You can build your own home if you have the experience. However, most lenders are reluctant to fund individuals to develop their own homes. You will have to provide a comprehensive list of requirements and proof of knowledge/experience in construction. If you are using a builder, make sure you work with qualified professionals. This will ensure your home’s value is higher than the loan you took to facilitate its construction.

IV. Business vs. residential construction

Your project, including aspects of why you build the home, usually determines the best loan for you. If you are applying for a residential construction project, there are loan products better suited to residential apartments. Just as there are loans for building your own home. Loans offered to businesses that are in the construction sector are also different. Knowing these minor details will help you pick the best construction loan for your unique needs.

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Bottom line

A construction loan can finance your dream home from scratch. It is ideal if you have the financial cushion to complete repayments within a year and deal with any construction set-backs. Upon completion, you can apply for an end loan and enroll for a current long-term mortgage plan. It is worth noting that construction loans are balloon mortgages that require payments to be completed by the time your home is finished. They are perfect for those with a piece of property they want to develop. If you are looking for a place to stay, a traditional loan or mortgage might be the right solution for your goals. Nevertheless, several lenders are offering feasible construction loans in the market. The above list comprises some top lenders that will allow you to build a unique home with your specifications.

Glossary of Loan Terms

FAQs

What is a construction loan?

A construction loan is also referred to as a self-build loan and is taken by an individual wishing to build a home or any other customized real estate project. The loan can be used to either fund the entire project or just the initial stages of the construction project before the developer acquires long-term funding. Some of the unique characteristics of a construction loan include the fact that it is short term and is only availed to certified investors.

What are the minimum qualifications for a construction loan?

Construction loans are a specialty of regional banks and credit unions as they have a better understanding of their local real estate market. To qualify for the loan, you must be a certified builder or prove that a qualified builder will oversee the project. You also must have a good credit score and raise the minimum down payment that ranges from 20% to as much as 30% of the cost of construction.

How long does it take for the construction loan to get approved?

Processing construction loan applications is a rigorous process that involves checking not just the financial background of the applicant but also their professional background as well as the viability of their construction project – the Blue Book. It may, therefore, take longer than mortgages – averaging between 7 and 10 days.

Can I use a physical asset as a guarantee for the down payment?

Yes. For instance, if you a piece of land and wished to acquire a construction loan to develop it, most innovative lenders will agree to hold onto the land documents as collateral for the loan. This in some cases, eliminates the need for the down payment.

What is the difference between a construction loan and a mortgage?

The key differences between construction loans and a home mortgage lie in the amounts involved, the interest rates charged, and repayment periods. There is only so much that a banker is willing to advance you in the form of a construction loan while mortgages carry extensive loan limits. Additionally, construction loans carry high and variable interest rates while most mortgages are fixed rate. Construction loans must also be paid within a short period – usually 12 months – while mortgages repayments can extend to as much as 30 years.

Do I have to pay closure fees twice?

Like most other real estate related debts, construction loans carry significant closing that is paid during loan application and approval. The second phase of closing fees for a construction home comes about if you wish to refinance the loan and convert it into a mortgage where you get to pay the closing fees associated with acquiring the refinancing loan.

Who can qualify for a construction loan?

While qualifying for a construction loan may be hard, it isn’t impossible. Before going through with the construction process, however, you must go through your lender’s qualification requirements to ensure that you fulfill their minimum requirements.

Types of Loan – A-Z Directory