A construction loan is a short-term loan used to finance the building of, or renovation of a home or other real estate project. These loans are typically are typically paid out in installments as the construction progresses. Construction loans are typically more difficult to obtain than traditional mortgages, as the lender must evaluate the plans and specifications for the project, as well as the builder’s/contractor’s ability to complete the project within a specified time frame and budget. However, construction loans can be a good option for those who want to build or renovate a home, as the lender disburses construction costs as they occur, rather than all upfront.
What Is A Construction Loan?
The Benefits of Construction Loans
- Allows financing of construction project
- Can be used for new construction or renovations
- Can be converted to permanent mortgage after construction
- Can include cost of land, materials, and labor
Who Should Consider a Construction Loan?
- Individuals or businesses building a new structure
- Homeowners planning significant renovations
- Investors building multiple properties
- Have a credit score of 620 or higher
- Have sufficient income to repay the loan
- Have a down payment of at least 20%
- Have a detailed construction plan
- Own the land or have a written agreement to purchase it
- Have a general contractor lined up
- Provide proof of ability to pay for the project
- Have a good debt-to-income ratio
- Have homeowner’s insurance in place or be prepared to get it
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