Home construction loans are very different than home loans. A construction loan is a means of borrowing a lot of money quickly to build a home. Repayment plans for this money are not part of a construction loan at all. Instead a home construction loan ends when construction is complete. Unused funds are returned to the bank, the amount used in construction is rolled over into a home mortgage loan which is designed to divide repayment into affordable monthly installments.
Some of the common features of construction loans are:
• The term which is usually a maximum of one year
• The amount of the loan, which is the estimated cost of construction plus ten to twenty percent to cover unexpected expenses
• The repayment of interest as money is used to purchase materials and pay workers
• The absence of payments to repay the principle until construction is complete
• The fact payment is due upon completion of the construction, making it a type of balloon note.
• The need for a secondary home mortgage type of loan to pay off the balloon note, and facilitate gradual repayment, because home construction loans don’t do that
• Flexibility of a construction loan’s components to fit the situation
Many banks allow clients to obtain both loans at the same time. Payments on the home loan will not be required until after construction, but having these details out of the way before construction starts, locks in the interest rate, and sets the terms of the home loan in advance. This is advantageous, especially when interest rates are low and could rise over the coming year. Most people also find it comforting to know that a means of repayment is already set in place.
First time home buyers often find loan applications a bit intimidating. The good news is that everyone involved is on your side, and wants you to get the loan. Your home builder or contractor, the real estate agent who sold you the land, and your loan officer will all be very eager to answer questions and help you fill out forms. The only thing you have to do is provide your information, and answer the questions they ask as accurately and honestly as possible. It is important to remember that lending institutions will investigate the information you give, and so lying is not an option, nor would it be advantageous to you if you could.
Everyone involved wants you to get the loan, and they are all trying to make this possible. The best advice is, when in doubt ask someone. You have plenty of experts at your disposal. Even with the complexities involved in filling out loan applications, the home construction loan application process is not unpleasant at all.