There are many options when it comes to residential construction loans. One of the most practical and popular one in today’s market is the construction-to-permanent loan. Also known as the “rollover” loan, this loan is two loans in one. During the building process it is a construction loan. A construction loan has many benefits, including interest only payments and no payments on money not yet used in construction. Later, when the house is built this loan will become a mortgage loan. The benefits of a rollover loan are one time closing, with one set of fees and being able to lock in the interest rate at closing, instead of gambling that the rates will not go up during construction. Below are some helpful tips when searching for residential construction loans.
Residential Construction Loans Tips: Preparing to Apply for a Loan
It is never too soon to start preparing for a home loan. If you foresee a home loan anywhere in your future, this is the best way to do it.
• Maintain a great credit rating.
• Keep the same job for years.
• Earn an income that is three times the average house payment.
• Do not accrue other debts.
• Pay all your bills promptly.
• Save for a down payment
If you have done all these things, getting a loan will be a snap. If you have problems in one or more of these areas, clean them up before applying for a loan.
• Do not apply for a loan if you have worked for your employer for less than one year. Wait till you’ve been there longer.
• Do not apply for a loan if you have outstanding medical bills or other unpaid bills. It is a good idea to call hospitals, and doctor’s offices and square up any small unpaid bills before applying.
• Pay off your credit card debts and car loans before trying to buy a home.
Residential Construction Loans Tips: Your Credit Score
Excellent: 740 – 850
Very Good: 700 – 739
Good: 660 – 699
Fair: 620 – 659
Poor: 580 – 619
Residential Construction Loans Tips: Pre-qualifying for a Loan
Any home builder, contractor, realtor or bank officer can pre-qualify you for a loan. Still it is better to understand the basis of prequalification before you apply. The question is how much money do you pre-qualify for, and will it be enough to build your home. To determine how much you may borrow calculate 33% of your income, and subtract from that the monthly payments on all your debts. You can see now why you’d want to pay off the car, and your credit cards before going to the bank.
Income $75K = $6,250 per month x 33% = $2062.50
The borrower can make $2062.50 per month in payments
The borrower has a car payment of $200 per month.
This is subtracted directly from the amount he can borrow for the house.
So $2062.50 – $200.00 = $1,862.50
It is determined that the borrower can make payments up to $1,862 per month.
• Using a mortgage calculator it is determined that the borrower can get a 30 year loan at 4% for up to 380,000.00. Over the next 30 years the borrower would pay $1814.12 per month or a total of $653,104.12 over the course of the loan. The cost of interest alone is $273,104.12
• If the borrower decided to only borrow $200,000 at 4% for the home, and not borrow the maximum amount, his payments would be $954.83 and his total after 30 years of payments would be $343,739.01. He would have paid $143,739.01 in interest.
• The same borrower could get a 15 year loan at 3% for $200,000, and pay a monthly payment of $1,381.16 per month. Over the course of the loan he would have only paid $248,609.39 for a total of only half as many payments. The interest would only be $48,609.38.
• Another interesting option is bi-weekly payments of half of the monthly payment amount. For example, on the 15-year loan above, making $690.58 payments every two weeks will pay off the loan 17 months early. The total interest paid would only be $43,775.32
It has been my experience that clients automatically think they should borrow as much as possible, on a thirty-year loan. This isn’t always a very wise option. Anything can happen in 30 years, and the possibility of default goes up when people are over extended. There’s always a possibility that their wages could go down and not up over time. It’s much wiser to start with a 15-year loan for less, and pay it off as quickly as possible. It’s OK to make extra payments. Why pay the bank over $100,000 in extra interest, when one could build a perfectly fine house for $200,000 pay it off in 15 years, while making lower payments, and save $100,000 in interest. Being informed about interest rates and tricks can save you hundreds of thousands in interest on rollover residential construction loans.