When you are having a home built just for you, a new construction loan is designed for the special needs you may encounter. The terms of a standard mortgage don’t always work for new builds, but you may qualify for a new home construction loan that can help fund the up front cost involved to break ground on your project.
What is a construction loan?
With a construction loan, you’re essentially asking a mortgage lender to fund something that doesn’t exist yet. These are typically shorter-term loans that pay for building a home. When construction is complete, most borrowers take out a new loan -- typically a traditional mortgage -- to pay off the balance of the construction loan.
How to qualify
Construction loans are more complex than a standard mortgage, requiring extensive planning. One reason is that you and the lender are assuming the property will have a certain value when construction is complete. Generally, there will be strict requirements for the loan, requiring you to have:
- A qualified builder
A qualified builder is a licensed general contractor with an established reputation for building quality homes.
- Detailed specifications
This includes floor plans, as well as details about the materials that are going to be used in the home. Builders often put together a comprehensive list of all details (sometimes called the “blue book”); details generally include everything from ceiling heights to the type of home insulation to be used.
- The home value estimated by an appraiser
Although it can seem difficult to appraise something that doesn’t exist yet, the lender must have an appraiser consider the blue book and specs of the house, as well as the value of the land that the home is being built on. These calculations are then compared to other similar houses with similar locations, similar features and similar size. These other houses are called “comps,” and an appraised value is determined based on the comps.
- A large down payment
Typically, 20% is the minimum you need to put down for a construction loan – some lenders require as much as 25% down. This ensures you lender that you're invested in the project.
Providing that you meet all these criteria and have good credit, you should be able to qualify for a construction loan. Generally, lenders also require information regarding your income (to be sure you can afford the mortgage payments) and your current home, just as they would with any type of standard mortgage loan.
If you have a specific idea of the type of home you want and need, a construction loan may be the right choice. Your Starion mortgage banker is ready to help you with the decision-making process.
Your Starion Mortgage Banker can help you decide if a construction loan is for you.
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