There are many reasons you might want to take on a construction project rather than buying an existing home: Maybe you already own the property; or you have a very specific custom home plan in mind; or you want to expand the home you live in and already love. Whatever the reason, our construction loan program is designed to help you manage the financial side of your dream project.
How does a construction loan work?
This is an over simplification but the easiest way to think about a construction loan is like a line of credit but with a predetermined disbursement schedule based upon project milestones. Some of the milestones include purchasing the property, site work, foundation, framing, rough electrical and plumbing. These disbursements are designed to pay the builder for the costs incurred at each completed phase of the building project.
Why is a “Construction-to-Permanent” Loan better than a “Double Close”?
Some old-school construction loan programs don’t provide permanent financing after the construction is completed. These are often referred to as “double close” programs because you need to refinance into a new permanent “end” loan after the construction is complete. This refinance process requires the trouble and expense of a second loan application and a second closing. Hence the “double close”.
Construction loan programs have become more consumer friendly over the years with “Construction to Permanent” programs that have many benefits:
- The cost of just one closing rather than two.
- The permanent interest rate is guaranteed at the beginning of the process.
- You don’t have to worry that a job change or some other factor might disqualify you from refinancing out of the construction loan.
- You make interest only payments on the amount you draw during construction. When the home is complete, the payment modifies to a Principal & Interest monthly payment for the full loan amount you have drawn.
The downside to construction loan projects
If you are building a new home or renovating an old one, you’ll need a place to live during the construction period. That means you’ll be making interest payments on the construction loan each month, paying property taxes (and insurance); along with the cost of your current housing.
When you buy and existing or pre-built home, you only pay what you and the seller agreed to. When you are building or renovating a home from scratch there are always unexpected expenses:
- Increased material costs
- Floorplan changes
- Going overbudget on preference items like flooring or appliances.
You’ll need to have cash reserves for these unexpected expenses.
How to qualify for a construction loan
The requirements to qualify for a construction loan are very similar to a regular conventional loan, with the exception that credit scores generally need to be in the upper 600s or even the 700s. Additionally, your debt-to-income ratio will include your current housing expense as well as the anticipated expense for the new home when it’s complete. If you are self-employed or if your circumstances are complicated in other ways, getting pre-approved before entering into an agreement with a contractor is the best course of action. Once the lender has reviewed your income documentation and your credit report, they can let you know how much you can afford to borrow.
There is more documentation needed for a construction loan than a regular conventional loan. Aside from the normal documents you would need (paystubs, W2s, tax returns, asset accounts,) you will also need to provide documentation for what you are building. You will need to have a detailed contract with your builder, plans, detailed specifications with a cost breakdown, material specifications, as well as the approved site plan and building permit prior to close.
Should you get a construction loan?
While some of the lending and documentation requirements can seem strict, they will help you in the long run. The documentation requirements don’t just protect the lender. They are there to help ensure that your project stays on budget and schedule for your benefit as well. Our single-close, Construction-to-Permanent Loan Program might be the right option for you to help you create your dream home.
You can learn more about single-close construction loans by downloading this PDF! Construction Loan Program – HarborOne
Feel free to call me at 603-471-9300 or use the form learn how to get a construction loan for your home building project.
This is not a commitment to lend or offer for an extension of credit. Additional terms and conditions apply.