What is a construction loan?
A home construction loan is a short-term, higher-interest loan that provides the funds required to build a residential property.
Construction loans typically are one year in duration. During this time, the property must be built and a certificate of occupancy should be issued.
How construction loans work
Depending on the type of construction loan, the borrower might be able to convert the construction loan to a traditional mortgage once the home is built. This is known as a construction-to-permanent loan. If the loan is solely for the construction phase, the borrower might be required to get a separate mortgage designed to pay off the construction loan.
What exactly does a construction loan cover?
- The cost of the land
- Contractor labor
- Building materials
- Permits
While items like home furnishings generally are not covered within a construction loan, permanent fixtures like appliances and landscaping can be included.
Types of construction loans
Construction-to-permanent loan allows you to build or renovate your home. When the construction process concludes, this loan rolls over into a traditional mortgage without you having to go through another closing.
Construction-only loan can be costlier if you will need a permanent mortgage because you complete two separate loan transactions and pay two sets of fees. Closing costs tend to equal thousands of dollars, so it helps to avoid another set.
Renovation Loan a variety of forms depending on the amount of money you’re spending on the project.
Construction loan requirements
- Good Credit Score
- Low Debt-to-Income Ratio
- Proof of sufficient income
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