Understanding Loans for Construction of a Custom Home
Construction-only loans
These loans are short-term loans designed to cover the cost of building a new home. The funds are disbursed in stages as the construction progresses. You will need strong credit and a down payment of 20% to 25%. The specific down payment requirement is determined by the cost of the land and planned construction. If you already own the land, you can use it as equity for your construction loan.
Construction-to-permanent loans
These loans cover the cost of building a new home, but they also convert into a traditional mortgage once the construction is complete. This means that you won't have to go through the process of getting a new mortgage once your home is built.
Some lenders provide a one-step loan that is interest only while the house is being built and then converts to a mortgage once construction is finished. The advantage is that you will have to pay closing costs only once. Some lenders, however, prefer a less risky two-step process. This requires you to take out an interest-only loan for construction and then refinance into a regular mortgage when the house is completed.
Owner-builder construction loans
These loans are designed for people who want to act as their own general contractor and oversee the construction of their own home. Owner-builder loans typically require more documentation and have stricter qualification requirements than other types of construction loans.
Renovation loans
If you're renovating an existing home or planning to add onto your current home, a renovation loan can help cover the cost of the project.
Home equity loans or lines of credit
If you already own a home, you may be able to use your home's equity to finance the construction of a new home. A home equity loan or line of credit can provide a lump sum of cash or ongoing access to funds, respectively.
It's important to note that the availability and terms of these loans can vary depending on the lender and your specific financial situation. It's always a good idea to shop around and compare options before committing to a loan.
