Construction Loans Houston
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What is a Construction Loan?
If you're ready to take the plunge and build your own home but don't have the finances to begin - one of the first things you'll need is a construction loan. This type of loan can help you finance the costs of building your dream home, from the ground up.
Here at Rock Mortgage, we understand that big dreams sometimes come with significant expenses – and we're here to help. Our experts will work with you to determine the best option for financing your new home. So, what are construction loans? First, let's take a closer look.
The construction-only loan, also known as a two-close construction loan, is a bit more complicated as it happens in two different phases. As the name implies, this type of loan is just for financing the construction of your home. Once construction is complete, you'll need to apply for a separate mortgage to pay off the construction loan. There are more variables to consider with this type of loan, but this one is an attractive option for future homeowners who prefer to pay more upfront.
If you're planning to buy and renovate an existing home, you can finance your project with a renovation loan. This type of loan can help you cover the costs of repairs, renovations, or even expand your living space.
An end loan is something a borrower would choose to file a single credit application. It's usually ideal for something short-term, like a construction project, even though the loan arrangement is more long-term. This is an attractive option because it allows the borrower to pay off the entirety of their debt quickly, which also helps them dodge the high-interest rates that often come with construction projects.
The construction-to-permanent loan is a type of loan that finances both the construction of your home and the purchase of your home when it's complete. Unlike a construction-only loan, this loan happens more conveniently in one fell swoop. This can be a good option if you need to figure out how long it will take to build your home or if you want to avoid the hassle of applying for two different loans.
Also known as a Self-Build Loan, this option is great when you want to leave all the details in the hands of the borrower. You have more control over the process when you act as your builder. However, bear in mind that you will still likely need the signature of a licensed contractor to be able to proceed. You'll also need to show verifiable proof that this isn't your first time building a house, so it's recommended to have the following available:
- Construction insurance
- Your license
- Construction process plan
- Home building experience
First Time Home Buyers in Houston May Not Need a Significant Down Payment
A down payment of 20%, or one-fifth of the total purchase price, is often recommended as appropriate for first-time home buyers. Even with Houston home prices being below the national average, this can be an unattainable goal. The good news is, in most cases, a 20% down payment is not necessary to secure a mortgage. Depending on the loan you choose, you may only need to make a down payment of up to 3.5%. With some mortgage products, there is no down payment required at all.
While this makes mortgages much more attainable for people of modest means, there is a tradeoff involved. First-time home buyers Houston who make a low down payment typically have to pay mortgage insurance as part of their monthly mortgage payment. This is separate from the homeowner's
policy that you have to obtain to secure your mortgage, protecting you from damage to your property. You must factor both the mortgage insurance and the homeowner's insurance premium into your monthly mortgage payment when determining whether you can afford it.
Construction Loan Requirements
Once you've decided what kind of construction loan is best for you and your project, there are some steps you should take to ensure you get what you need. As long as you have all four of the following requirements in hand, you should be good to go:
- Sizable downpayment: usually between 20%-25% upfront
- Builder or construction Team: DIY projects are great, but only if you have the qualifications to pull it off safely and accurately
- Appraisal and estimate of the home value yet to be built
- Detailed construction plan: timeline for completion, materials, and profit projections
You can apply for a construction loan like any other Rock Mortgage loan and then borrow the funds at predetermined intervals. From there, depending on the type of construction loan you picked, you can transition your project into a more permanent mortgage once your project is complete.
The Profile of a Construction Loan Applicant
The more information you have to provide your lender, the better. If, for any reason, your lender feels you're a risk that isn't worth investing in, they'll turn you down without hesitation.
So, when you apply for a construction loan, your primary objective should be to inspire the bank to see your project as worthwhile and reliable. To do that, you've got to prove that you've done your due diligence and know the risks and rewards of the project before committing.
Some good things to have in hand when you go to apply for a construction loan are:
- Signed credit authorization
- Recent pay stubs
- Proof of income
- Any form of retirement statements
- Recent bank statements
- Layout plan
- Septic and plot design plan
- Building permit
- Hazard insurance
While this is not a comprehensive list, and we recommend conferencing with your chosen bank for more specialized instruction, these items are a great place to start. Having a fuller profile will increase your chances of getting your desired loan because it leaves less uncertainty in the mind of your potential lender.
Choose a Construction Loan with Rock Mortgage
Construction loans can be a great way to finance your new home. But it's essential to understand the process before you get started. If you have any questions about construction loans, our experts at Rock Mortgage are here to help. So contact us today and let us help you make your dream home a reality.