The average home construction cost is just shy of $400,000 in 2023.
If you’re looking to finance a construction project, such as a home, you may need to consider getting a construction loan. This is a short-term, high-interest loan that goes straight to your contractor to pay for the construction of your new home.
It’s a great way to approach building a home because there are always a lot of expenses you have to think about. Having a construction loan prevents you from having to be the middle person between your lender and home builder. Keep reading and find out if it’s the right move for you.
- You Need a Plan
You should never attempt to secure a construction loan without having a building plan in place. Besides the fact that you could end up wasting money without your ducks in a row, you may not actually get approved without a firm plan complete with a builder.
The best move is to start speaking to lenders once you’ve gotten a quote and chosen a builder. Once you’re approved for the loan, you can break ground immediately.
- Pay Down Debt
Another thing to do before applying for a construction loan is to pay down your existing debts. These are high-interest loans that aren’t always easy to secure due to the sheer amount of money being lent.
With a traditional mortgage, the house would be used as collateral for the loan. This obviously isn’t the case when there’s no existing structure, which makes construction loans a bit more complex. Have your credit score in order and debts paid down to put yourself in a good position.
- Understanding Types of Loans
There are a couple of different types of construction loans. The first is known as a “construction only” loan, which gives you the money for the construction project only. You have to start paying this back in full upon completion of the build.
The other type – a “construction-to-permanent” loan – folds the construction loan into a traditional mortgage after the home is erected.
It’s a really good idea to go over the timeline of your build and any issues that may get in the way of your timeline with your builder. Construction loans, being short-term, don’t necessarily leave you much leeway with your timeline.
- Getting a Construction Loan From a Good Lender
Finding a great lender to give you construction financing can be even trickier than getting a mortgage. They’re complex loans due to the fact that your builder draws from the loan, but it’s in your name. It’s important to shop around to find rates that work for your project, as well as your financial health.
You can also look for a low doc construction loan provider. These are easier to obtain and protect you as the home is being built.
Finance Your Construction Project
Now that you understand a bit more about getting a construction loan, it’s time to finance your new home. Building a custom home isn’t cheap, but it’s well worth it once you’re living in the perfect house. Get your construction loan today and break ground with your builder.
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