The idea of building a new home is both exciting and intimidating. Everyone would love to have a house designed and built exactly how they want, but the costs and challenges of a residential construction project can quickly spiral out of control if you’re not organized.
If you’ve been dreaming the dream of building a new home (or renovating your current home) but the cost to build your dream home seems insurmountable, we have good news: taking out a construction loan could help you make your dream a reality.
If you’ve been wondering how you could qualify for a construction loan, then this short guide is for you. It will explain how construction loans work and what you need to do to qualify so you can manage the cost of building your new home.
What do I Need to Know About Construction Loans?
Construction loans are an important credit tool that is often misunderstood and under-utilized by the general public. Construction projects can be full of uncertainties and variables, but a construction loan can give you the solid financing foundation you need to see it through to completion.
First, let’s take a quick tour of the basic terms and conditions attached to most construction loans.
In general, they are used when people are looking to build a residential property, but they can be used for anything involved in the construction process, like purchasing real estate, hiring a general contractor, buying materials or paying for permits.
Also, a homeowner can use a construction loan towards renovation or restoration projects.
How Construction Loans Work
These loans are generally used by home builders or by people who want to finance the construction of their own new homes.
Construction loans are essentially specialty short-term loans, where the borrower can refinance the loan into a mortgage after the construction has been completed to pay off the balance of the construction mortgage loan (which is sometimes called an “end loan”).
The approval process for a construction loan is a bit more detailed than some other credit options because it is specifically tailored to construction needs.
As such, applicants need to have building plans and a construction budget before they can be approved. After approval, construction loans are usually paid out in stages, as the project advances. Interest is paid only on the outstanding balance of the loan.
Terms and conditions will vary from case to case, as the borrower could be required to make interest payments on the loan while the construction project is underway or pay off the balance entirely once construction ends.
Lenders tend to require down payments for construction loans in the range of 25% to 30% of the lot purchase. Also, if a borrower has weak credit, they could have a hard time qualifying.
Pros and Cons of a Construction Loan
Construction loans have some benefits that other forms of credit simply cannot match. They can be advantageous because:
- While the project is underway, borrowers only have to make interest payments on the amounts advanced at each stage.
- Construction loans provide highly flexible terms. Although borrowers have to be transparent with their plans and progress, lenders can adjust advances to meet the needs of the project at hand.
- They help structure construction projects. Because borrowers need to demonstrate planning prior to loan approval, it helps them keep their projects on budget and on time.
This kind of loan also has some drawbacks that should be taken into consideration:
- Construction loans can be more difficult to qualify for. These loans have higher credit and down payment demands than some other kinds of loans.
- The interest rates are higher than traditional mortgages. But one thing to remember is it is for the period of time of construction.
Trust Tribecca for a Home Construction Loan
One of your main concerns when considering taking out a construction loan is partnering with a company that takes the time to work with you, and understand your needs so they can structure the loan product in such a way that it makes sense for your budget and timeline. Tribeca Finance is just that sort of company.
For obligation-free guidance on how to get a construction loan, Ontario look to us for help. Click here to reach one of our specialists by phone or email, or get the ball rolling on your home construction project by following this link to submit your application.
At Tribecca, we’re always happy to speak with you and answer any questions you may have, so get in touch today!