If you’re thinking about building a house in Houston, Texas, you have many options when it comes to financing your work. A construction loan, for example, can give you the capital you need to get the job done. But how is this loan related to mortgage loans? And which one is harder to get? This guide can help you learn more about each loan type to ultimately help you decide which option is best for you.
What Is a Mortgage?
A mortgage is a long-term loan that you can take out to finance the cost of a home, land, or other real estate option. When you borrow money for a loan, you’ll pay the lender back with a series of regular payments that include interest that builds over time. You’ll also use the property as collateral, or an asset that your lender will accept as security for the loan.
Before applying for a mortgage, check your eligibility with your lender, including your minimum credit scores and down payment requirements. Your application will then go through an extensive review process designed to evaluate your ability to pay back the borrowed amount in full. Explore our website to learn about this process and begin your application.
What Is a Construction Loan?
A construction loan is a sum of money that you can borrow to help you pay for a construction project. While a traditional mortgage helps you finance the purchase of a house that’s already built, a construction loan can help you build your own residence. Besides the different purposes between a mortgage and a construction loan, they also hold differences when it comes to the length of the loan, financing requirements, the disbursement of payments, and the down payment. Depending on the type of loan you select, your application process may be more challenging and time-consuming.
Construction Loan vs. Mortgage
Here are some of the differences between each loan type:
In general, construction loans are very short term. They may have a lifespan of one year or less. A mortgage, in contrast, lasts longer, with many borrowers taking up to 30 years to fully pay back their loans. Some construction loans might automatically convert into a permanent mortgage once construction is over, though, allowing them to continue.
The requirements for a construction loan may be more complicated than those of a traditional mortgage. A construction lender will often ask a borrower to produce detailed plans of the construction, a clear timetable for the work, and a sensible budget that shows the borrower’s ability to finish the project. For a traditional mortgage, a lender may evaluate your credit score and ability to pay back the loan, but you shouldn’t have to submit any business plans or schedules.
Unlike a standard loan, a construction loan gets to the borrower in phases. You may break the project down into phases and receive money as you complete each part, or as you need it. To keep a close eye on the project, construction lenders may send representatives to the work site to see that everything is going according to schedule.
Down Payment and Interest
Typically, a construction loan requires a higher down payment than a traditional mortgage. In some cases, the standard down payment requirement for a construction loan is 20%. Luckily, builders can use their land as a part of the down payment as long as they own it in full. Similarly, the increased risks of betting on the successful completion of a project often leave construction loans with higher interest rates than those of a traditional mortgage. Although, as interest may have less time to build over the loan’s shorter term, this may be less of a problem.
Is a Construction Loan in Houston Harder To Get Than a Mortgage?
In general, it’s harder to receive a construction loan than a mortgage. This is because there are more extensive requirements, a larger down payment, and higher interest rates to manage. Still, a short-term construction loan may be the right choice if you’re looking to build a home. Your rates and requirements can vary based on the loan type and lender.
When you’re looking to secure funding for the home of your dreams in Houston, you have plenty of choices. Two of these options, the traditional mortgage and construction loan, have different terms, requirements, and goals. While it may be harder to get a construction loan in Houston, you may want to consider all of your available options. If you have any questions, Rock Mortgage is here to make the process simple and clear every step of the way.