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WHAT IS A CONSTRUCTION LOAN AND WHEN SHOULD YOU ASK FOR ONE?

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Whether you want to take on a new challenge, like the idea of ​​living in a home that’s exactly your size, or you’re simply having trouble finding something you like in your area, you may have thought about building. Building your own home is one way to ensure that you can move to your ideal place. However, it has a totally different type of financing: the home construction loan.

What are home construction loans?

A home construction loan is a short-term loan that allows you to finance the construction or renovation of your property.

It is characterized by higher interest rates and, unlike the type of loan obtained for the purchase of a property, is based on the expected value of the home after the work is completed and not on its current market value.

In the EU, these types of loans are especially intended to promote energy-efficient construction and renovation, so if your project is in Europe, you should take this into account when planning the work.

Types of Home Construction Loans

There are three main types of loans to choose from.

Construction Only Loans

With a construction-only loan, you pay off the entire loan amount upon completion of the job. This is a good option if you have a large amount of capital at your disposal, or if the projected sale value of your current property is equal to or greater than the cost of new construction.

Permanently Convertible Construction Loans

Getting a permanent convertible construction loan means having a firm work schedule before you start. With this type of loan, the lender pays the construction crew as the project progresses, and the entire cost of the loan is converted into a mortgage once the house is completed.

Renovation loans

It is a type of home construction loan that will allow you to renovate an existing property instead of building a new one. You can often get government-funded loans for these types of projects, where the repayments become part of your mortgage in addition to the cost of buying the property in the first place.

How to get home construction loans

In many cases you will find that you need to have an excellent credit rating and up to 25% of the projected cost of construction up front. Therefore, it is essential to take stock of your finances and do a detailed cost estimate.

It is also necessary to have a schedule and stick to it as closely as possible, because most lenders will disburse the loan in installments that correspond to the work schedule. This means that they are likely to carry out inspections and contact your builder before approving each installment.

Finding a builder you trust and doing a thorough evaluation before hiring is also a necessity, even more so than usual. Since they will be in control of your construction schedule, your loan installments may depend on your professionalism and punctuality.

With the right investment advice and a good understanding of real estate, home construction loans can be an investment in your financial future. Considering the projected value of the finished home and all the ways to maximize it, by building the right type of home, in the right place, in the right way, you can create an asset that only grows in value.

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