4 Things You Should Know About Construction Loans

by Greg on March 4, 2019

Construction loans

When you have decided to reconstruct your house instead of buying a new one, you will have to consider the option of a loan if you don’t have enough funds. The construction loans differ from normal loans in a few ways. The amount of money you can borrow will depend on the approximate projected value of the house. The interest rates are usually higher, and the term of a loan is shorter. The total sum is transferred to you after the completion of the project. These loans have flexible terms and guidelines, unlike the normal ones.

Here are a few things that you should keep in mind while applying for construction loans:

1. The Builder You Choose Should Be Qualified Enough

The final outcome of the constructed work depends solely on the builder that you choose for construction work. The builder has an impact on the construction loans you get. He should have a license that will act as proof that he is permitted by the government. Having a license also means that he is well reputed in the industry for a long time and has a generous experience. But getting a loan could be tricky for you if you decide to do things on your own. The financial institutions require a builder as proof that things will go well.

Qualified builder

2. The Down Payment You Are Willing To Pay

The down payment is an important aspect of any loan. In construction loans too, you will have to pay a considerate amount of money as down payment. At times there is a fixed percentage of the total amount that you have to pay as a down payment in the beginning. The amount usually is 20 to 25 percent of the total sum approximately. This amount can be termed as a nonrefundable deposit that you will pay. But irrespective of the compulsion to pay down payment, you should always pay some amount beforehand. This will give you a little less burden of repaying the huge amount with interest rate. This also works as a guarantee on the side of the lender that you won’t go away if anything goes wrong.

Down Payment

3. The Value Of Your House Must Be Estimated By An Appraiser

Though your house is not ready yet, there must be a person who will give an appraised value of the house. No matter even if it is estimated, a value of the newly built house is required by the financial institutions. The value of the land that your house is built on is also taken into consideration. The value that is calculated is then compared to other houses that are similar in size, features, and location which are termed as comps. For construction loans, appraiser value is essential.

Home Appraiser

4. The Rate Of Interest, Fees Charged And Process

You should be free in talking to the financial institution when it comes to the rate of interest and the fees charged. The financial institutions usually charge some amount of total sum as the fee for processing your construction loans. This fee amount is a mere percentage of the total sum. The rate of interest is usually high here. But sometimes they may consider negotiations. So always try doing it. The process is long if you choose a public bank and if you choose a private bank it is quite liberal. It is better for you if you check the process and know the laws in advance. This will make sure you are not fooled.

These are the things that you should keep in mind while applying for a loan for construction.

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