Sometimes you just can’t find that dream home that checks all your boxes. So what do you do?
Many people have a custom home built, and others buy an existing home with plans to remodel extensively and turn it into their dream. In either case, they’ll need a construction loan – and that’s a different animal from a standard mortgage loan.
Construction Loans are not like traditional mortgages, and they have some specific requirements. What makes them different is because of the owner occupied requirement set by the Federal Housing Administration (FHA), as well as the bank, where it’s possible that two separate loans will be granted together.
So here’s what you need to know about construction loans when buying a house in Boston.
What Is a Construction Loan?
Construction loans are shorter term, higher interest rate mortgages that cover the cost of building or rehabilitating a house. The lender pays a construction loan to the contractor — not the borrower — in installments as building milestones are achieved. Once building is complete, home construction loans are either converted to permanent mortgages or paid in full.
The great thing about a construction loan is that it allows you to have everything you want in your home. You’re not limited to only what you get in an existing home – it makes it possible for you to build the home of your dreams. Wit h a construction loan, you can choose everything from the foundation, the number of rooms, the style of home, and all finishings. You won’t have to give up anything that’s important to you.
But the construction loan process can be fairly complicated.
Construction Loan Types
This type of loan does double duty by providing financing for both the construction and your permanent mortgage. In other words, with a construction-to-permanent loan, you borrow money to pay for the cost of building your home, and once the house is complete and you move in, the loan is converted to a permanent mortgage. The benefit of this approach is that you have only one set of closing costs to pay, reducing your overall fees.
The process of getting a construction-to-permanent loan is not always as simple as getting a first mortgage. Banks and homebuilders are looking at more than just your credit record to determine if you’re a good risk. They’re also looking at other factors, such as the availability of collateral or savings, if you have enough equity to borrow off and if you have enough income to make the monthly payments. For this reason, preparing for the process of getting financing is very important.
CONSTRUCTION ONLY LOAN
As the name suggests, this type of construction loan provides funding only for the construction portion of buying a home. Construction Only Loans are different from home equity lines of credit, private lending or conventional loans. If you’re looking to purchase a new home and need help funding your project, this might be the option for you.
The borrower is responsible for either paying the loan in full at maturity (typically one year or less) or obtaining a mortgage to secure permanent financing. The funds from these construction loans are disbursed based upon the percentage of the project complete.
If you plan to buy a home that needs extensive remodeling, you may consider applying for a renovation loan. This type of construction loan is designed for people who are purchasing a property that requires extensive repairs and remodeling.
Renovation loans are built for people who want to fix up their home or buy a home that needs some major work. If you’re trying to buy a home that needs a significant amount of work completed, and you plan to do it yourself, then you’re most likely going to need one of these loans.
Owner-builder loans are construction or construction-only loans where the borrower also acts in the capacity of the home builder. The problem with this type of loan is that most lenders won’t allow the borrower to act as their own builder because of the complexity of constructing a home and experience required to comply with building codes.
How Does a Construction Loan Work?
A construction loan is different from the traditional mortgage loan you would get for buying a home in Boston. Here are some of the differences you’ll encounter with a construction loan:
- Could involve variable rates that move fluctuate with the prime rate
- Higher rates than with traditional mortgage loans because there is no existing home to serve as collateral
- Requires a construction timeline, detailed plans, and a realistic budget
- Money is paid out by lender in stages according to construction progress
Construction Loan Considerations
Now, if you decide to get a construction loan, there are a few things you need to keep in mind:
- Will you encounter any factors, such as bad weather, that can delay the construction?
- Will you need to obtain more than one loan to complete the project?
- How much will closing costs and other fees be if you have to get more than one loan?
- Do you have or can you get the funds to purchase the land to construct your home on?
Getting It Right When Buying a Home in Boston
So if you can’t find your ideal home, your dream doesn’t have to end there. You have the option of getting a construction loan and building your dream home from scratch or turning an existing home into your dream home. And you have several construction loan paths you can choose from to help you realize your dream.
If you’re looking into a construction loan as part of your plan for buying a house in Boston, contact us today at (617) 657-9811.