When it comes to financing a home, most people understand the fabric of a basic mortgage, but construction loans can be intimidating for those who have never had one before. For more than a decade Diditan Financial has been helping people secure construction loans to build homes. When the process is unmasked, brought to light, and broken down, it really shows its true facade revealing advantageous home loans for buyers with collateral who want a fresh space, designed to compliment their essence and aesthetic tastes. In fact, some say why pay for another person’s vision when you can build your own?
How do Construction Loans Work?
First, let us differentiate between a construction loan and a “traditional” loan. When a current homeowner has a mortgage on an existing house with what is normally a 30-year fixed rate requiring the borrower to make interest payments and principal throughout the duration, you have a traditional loan. These are the most popular mortgages, meaning they are held by the most homeowners, and obtained through special programs like the FHA (Federal Housing Administration) or through traditional lending institutions.
A construction loan is a different breed of animal all together; it is underwritten to run according to the time it will take the contractor to complete the build. Your average 2000 sf home generally takes about 12 months on average for the construction phase to complete, given there are no unpredicted complications such as bad weather, or sinkholes. Your lender will allocate a line of credit up to a certain limit before you must submit draw requests. Think of this process like a pre-paid mobile phone using “pay-as-you-go” minutes. Here is an example: let’s say you have been approved for a $900,000 construction loan. You won’t even have to start paying anything until your home builder issues a draw request, perhaps $40,000 to put down the sub-flooring and that Venetian marble for your kitchen floor. Then you will only pay on interest of the sum of $40,000. Diditan Financial is standing by to help you determine if construction loans are truly beneficial to meet your needs. In the meantime learn how to qualify for a construction loan and research some of the other important questions others are asking about this niche home loan type.
How Does a Mortgage on a Construction Loan Work?
First things first, there is no balloon payment on a construction loan mortgage. Once the home is built, the construction loan balance remainder transmogrifies into a mortgage. There are zero prepayment penalties, affording the luxury of paying the balance off before it is due. So, as you can see, many borrowers who have never taken out construction loans think there is a balloon payment at the end, but your mortgage simply pays this off.
What are the Benefits of Buying a Newly Built Home Versus an Existing Home?
There are man benefits to buying a newly built home that include:
- More Space. Newly built homes generally have more square footage, especially in terms of closets, the garage, and storage. The layouts are also more spacious and cohesive to today’s lifestyles (site-lines from the kitchen to the living room, for example).
- Health advantages. Today’s homes avoid using asbestos, lead paint, and formaldehyde emissions. Many newly built homes also include randon control systems.
- Energy efficiency. Today’s newly built homes come with the latest in insulation technology. improved heating and cooling systems, and some homes even come with solar power.
- Todays new homes come with hard-wired smoke detectors and battery-powered back up alarm systems, as well as emergency generators.
How to Get a Construction Loan
Securing a good construction loan requires one to go above and beyond the conventional trappings of finding a well-known lender, going through the qualification process, and building within your means. Rather, it requires you to partner with an outfit of professional home loans experts who not only know every pitfall and loophole in the world of home loan solutions, but who also have your family’s best interest at heart. We understand that your new home build is not just a place where you will lay your head at night; home is where families create their legacies, and it is likely going to be the largest investment you will make in your lifetime. Diditan Financial wants to protect your investment and ensure that the best construction loans with the lowest rates are assigned to each and every one of our clients.
Telling a Good Loan from a Bad Loan
Construction Loans are a lot like credit cards; there are good ones with tons of flexibility and low rates, acceptable ones that offer the industry standard, and bad ones that make that Diners card you carried in the 80’s as attractive as today’s American Express “black card”. A good loan allows you to qualify for as many bonuses as possible, and its rates are low compared to the current market standard. On the contrary, a bad loan is simply one with no allowances and that has high rates, but considering most construction loan borrowers must have good credit and an established financial history, the carbon-copy “bad loan” is a tougher breed to come by in this lending category. Your first step is to talk to a trusted Diditan Financial adviser. Even if your credit score is great, we may see things that the untrained eye would easily miss that are simple to correct and that could save you thousands on the spot. Our dedicated advisers can answer all of your questions about how construction loans are structured, and we can analyze your portfolio to determine your best options. The loan amount will be a vital part of our conversation, and an important one to have with the builder in deciding what materials and features to include in your new home.
Qualifying for Construction Loans
To get qualified for construction loans you will need to submit your debt, income, and asset information to our Diditan home loan specialists. You will also need to give us your purchase contract with your builder. Your loan will be impacted by various aspects of this contract, such as land cost, construction costs, contract amount, and the start and completion dates. When you negotiate the contract with your builder, be sure to do your research so you can banter for some flexibility. For example, add provisions that give you the power to make change orders because it is highly likely you will need to change some of the original specifications–you may discover layers of bedrock that require the deep end of the swimming pool to move from the east end to the west end.
Based on your debt-to-income ratio you will want to qualify for an initial loan payment (if you are purchasing the land) that is easy to live with. In the event your name is on a current property loan where you intend to build new, that loan will be paid off before the construction phases start by the first disbursement of your construction loan. Our Diditan Financial team will qualify you for a 12-month loan that mirrors the construction phase timeline with interest-only payments. Your financial institution will schedule these payments to your builder, and ensure the work is being completed at a stage-by-stage basis before the next disbursement rolls out. One thing people love about construction loans is that they only involve one application and a single closing that solidifies the construction phase and financing period.
What are Construction Loan Rates?
Diditan Financial offers a plethora of construction loans to borrowers who are purchasing a new home, or refinancing a current one. Our experts are trained to help you find the ideal loan to suit your needs and stretch your money. Interest rates for construction loans can fluctuate, so it is beneficial to stay up to speed on the current market. Our professionals at Diditan Financial always use the most current information and we educate clients to ensure you not only make the right decision, but you understand why it is your best option.Just to give you an idea, here is a chart showing construction loan rates good for June 2016:
Diditan Financial will analyze your credit, check your debt-to-income-ratio, gather your assets,and comb through all the construction loans out there looking for the ideal one to maximize your living standards. Our professionals formulate an application to get you the lowest rates and the best deal that can be extracted from the market’s tight-gripped fingers.
Is a Construction Loan a Closed-End Mortgage?
A closed-end mortgage is very restrictive, as the borrower is not able to refinance the home, renegotiate the mortgage, or take out a home equity loan without the lender’s approval. A closed-end mortgage is set so the principal amount can’t increase and the mortgage can’t be used for additional borrowing by offering excess collateral. Although some construction loans can fall into this category, most are open-ended meaning the principal balance may increase over time. Many borrower’s prefer this option because in the event certain conditions come up, or changes are made requiring more money, the borrower may request to raise the loan amount assuming appropriate conditions are met. For example, if a couple buying a new build home decides to change kitchen design mid-way through the project opting for high-end finishes and a change in the layout, they would be able to fund the difference with an open-ended mortgage. Another scenario might involve a borrower deciding to have a guest house built in the back, thus requiring a larger budget and a pricier mortgage. So, while some construction loans can be underwritten as closed-end mortgages, others (most) can offer borrowers more flexibility through the building process, and even in the later stages of fulfilling the loan.
Why Work With Diditan Financial for Construction Loans?
Is the loan open-ended or a closed-end loan? How high can balloon payments go? How will my home compete in the market 10 years from now? Can I really afford a construction loan with these terms, and what are my risks? Your new build home is likely going to be your biggest investment, and you need to know the ins and outs of construction loans at every level. This is why it is of paramount importance you call Diditan Financial so we can help you navigate the pitfalls that can come with construction loans. We are on your side; Diditan Financial ensures our clients get the most flexible construction loans, and that no smoke and mirrors are in place. We educate our customers to know exactly what they are getting into, we explain why our recommendation is the best option, and we even show borrowers alternative loans and funding solutions so they can make big decisions with confidence.