What Type of Loan Is Best for Building a House?

Jamie Ayala

Jamie Ayala

Jamie Ayala has been working as a Loan Processor at Rock Mortgage for more than 4 years. As a knowledgeable account executive he has had many years of customer service experience in the loan, information technology, and political industries. Recognized for demonstrating a natural aptitude for working with cross-functional teams, as well as for meeting deadlines and validating loan documents, Jamie has a verifyable history of consistently exceeded sales and performance goals. His professional focal points include loan processing, client negotiations, team collaboration, and project management.

As you shop for a house, you might find that existing properties don’t line up with your idea of a dream home. Maybe the layouts aren’t quite what you’re looking for, or perhaps the homes are missing non negotiable elements like a pool. Considering how big of a purchase a home is, you should ensure you get exactly what you want and do limited compromising.

The good news is that house building in Houston is always an option. Who wouldn’t want to design their layout from scratch and choose their preferred style, whether it be colonial or mid-century modern? While building your home can seem far-fetched when you don’t have the money upfront, you can always finance this project. Here at Rock Mortgage, we’re ready to discuss the types of loans that are best for building a house. This article should leave you with a better understanding of the financing options available to you.

Type Of Construction Loans to Build a Home

What Is a Construction-Only Loan?

A construction loan is any type of financing that helps fund the building of a house. Several types of construction loans are available. The first one we’ll discuss is a construction-only loan, which provides funds exclusively for the building portion of your project. The lender distributes these funds based on the percentage of the project completed and collects interest from the borrower. As a short-term solution, a construction-only loan usually requires the borrower to pay the loan in full in one year or less.

This type of construction loan for building a home isn’t ideal for those who’ll need a permanent mortgage after they complete their project. For one, you’ll have to pay separate closing costs for your construction-only loan and permanent mortgage. Another potential downside is that if financial hardships during the construction project cause you to become ineligible for a permanent mortgage, you won’t have the funding you need to pay off your new home.

What Is a Construction-to-Permanent Loan?

A construction-to-permanent loan is similar to a construction-only loan in that it covers the cost of building a house and requires borrowers to make interest-only payments during the construction process. Once the house is complete, the loan converts into a permanent mortgage. Borrowers will start to make payments that cover the principal and interest for the standard 15 to 30 years. This two-for-one deal allows you to avoid duplicate closing costs and save upward of thousands of dollars.

What Is a Renovation Loan?

Those who want to upgrade an existing property should consider a renovation loan. Many homeowners use a credit card or obtain a personal loan if the renovations cost less than $20,000. More expensive renovations may call for you to tap into your home’s equity by applying for a home equity loan or obtaining a line of credit. Yet another option is a cash-out refinance, which involves taking out a new mortgage that’s higher than your current one and receiving the excess amount as a lump sum.

Qualification Requirements for a Construction Loan for Building a House

A construction loan for building covers costs for land, permits, materials, and labor. Because the house isn’t built yet, lenders consider this type of financing to be risky. They minimize the risk of you walking away from the project by implementing higher interest rates and ensuring you have good credit. Additionally, you might need to provide a “blue book” that shows you have a comprehensive plan for your project before completing the loan process.

If you’re still unsure which type of construction loan for building a house is right for you, contact Rock Mortgage today. Our experts can walk you through your options and match you with the appropriate financing for building a house in Houston. Whatever type of home you want to build, we’re here to help you make your dream a reality.