The Basics of Construction Mortgage

Are you planning to build your own house rather than buying an existing one? Well, you may have heard about construction loans and wondering how does this loan work.

Building a house requires a lot of effort, knowledge, time as well as money, patience, and a reliable mortgage agency to support your objectives.

You must know every single thing about building a house, which includes but is not limited to the loan that you will be using to help you build your dream house, the terms and conditions of your mortgage agreement, and the loan method available for you, to name a few.

At this juncture, it is important for you to know about what a construction loan is (or any type of loan you are about to get for that matter) before you commit yourself to it.

Keep on reading for you to better learn the basics and understand how this loan works in funding your house build project.

Construction Mortgage Defined

One question running through your mind right now might be, “What is a construction mortgage loan ?” You will find below our answer to your query:

A construction loan is a short-term loan that covers the cost of building your house (e.g., permits, materials, labor, etc.)

Construction loans are different from traditional mortgages because the former is a must for housebuilders or individuals who want to erect their own residence. The latter, on the other hand, is your general type of loan that you can use to fund everything else outside of house construction.

This type of loan is likewise considered relatively risky; hence, its interest rate is usually higher than traditional mortgage interest rates.

Hoes Does Construction Loan Works?

Getting a construction loan is harder than a typical mortgage. The builders or borrowers need to have at least a 20% down payment or equity to qualify for this type of loan as contrasted with traditional mortgages where they are allowed to use their house as the collateral itself.

Under this loan, the borrower doesn’t have an asset yet to secure the mortgage; hence, the interest rate is a little bit steeper compared to traditional mortgage rates.
To qualify for this loan, you need to give the lender a detailed plan of your project including all projected expenses. If the construction loan is taken out by the borrower then the lender will have to give the funds directly to the construction company rather than to the borrower(s).

3 Types of Construction Loans

There are three types of construction mortgage loans you can choose from:

• Construction-to-permanent – It converts to a permanent mortgage when the building is completed. This will allow you to have a lock-in interest rate at closing.

• Construction-only – Under this type of loan, you must pay in full the amount due once the building is completed. It is recommended if you have a larger amount of funds to work with.

• Renovation construction – If you want to renovate your property, this type of loan is your best option. The cost of renovation is included with the mortgage along with the property value after repairs.

These are the home construction loans available at your disposal depending on the type of house construction agreement you drew up with your home building team.

Final Thoughts

Some people choose in buying a brand newly constructed house instead of an existing one. It is, however, exciting to have your own house built from the ground up; hence, some choose to construct their own house.

Just keep in mind that as a builder and future homeowner, you must be financially capable to shoulder your loan payments.

We suggest that you commit yourself to diligent research before applying for a construction loan so that you will end up working with a reputable construction mortgage broker with extensive experience in dealing with home construction loans.

We are a trusted financial company that has helped 96 clients materialize their dream homes in Canada. Our vision is to help families build, develop, and/or improve their homes for them to live inconveniently and comfortably.

Call 416-825-0142 or email today to learn more.

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