When you finally make the decision to build a new home, finding the right construction loan to meet your funding needs can be difficult. After-all, there are many different types of construction loans available today. And, these can change depending on the lender you go with. In this article we are going to explore the different types of construction loans and help you decide which is best for you.
Conventional Construction Loan
Essentially, a conventional construction loan is the standard type of a construction. It is the most common to a traditional mortgage many home builders are accustomed to. The difference between a conventional construction loan and a traditional mortgage is their uses; a conventional construction loan is a loan intended to fund the complete build of a house and then be automatically converted to a permanent mortgage.
On a conventional construction loan, buyers will pay only interest payments on funds which have been disbursed to the builder through draws. This means you can expect to have lower monthly payments starting out which will slowly increase as more funds are disbursed until the building process is complete.
Conventional construction loans typically require good credit and at least 5%-10% down payment.
VA Construction Loan
VA construction loans are designed for veterans or current members of the armed services; if you qualify for a traditional VA loan, chances are you will qualify for a VA construction loan. You are eligible to apply for a VA construction loan if you have served 90 days of active service or completed 6 years of honorable service.
Simply put, VA construction loans are excellent loans that offer 100% financing for building a custom home. With this type of construction loan, you will likely be building a stick-built home, which refers to a home built from the ground up rather than a modular or mobile home.
FHA Construction Loan
If you’re wanting to buy a piece of land, fund the build, and then finance a permanent mortgage all within the same loan, the FHA construction loan is the one for you. Backed by the Federal Housing Administration, hence the meaning of FHA, this loan comes with certain requirements for lending, but is backed and insured by a government agency.
FHA construction loans typically require a lower down payment, and have more forgiving credit requirements vs conventional loans.
There are two types of FHA construction Loans: construction-to-permanent and 203(k) rehabilitation loans.
FHA Construction-to-permanent
Just as the name implies, these are the loans designed to take you through the complete building process, through the purchase of your land to the permanent mortgage, and everything in between. This gives you the flexibility you need for a dream project while keeping all of your funding contained in one monthly payment.
FHA 203(k) Rehabilitation Loans
These types of construction loans are designed to take a home already built and turn it into your dream home through renovations. These loans can be used for upgrades to the home’s utilities, remodeling the kitchen, upgrading the bath, and landscaping upgrades.
USDA Construction Loan
Wanting to build in rural America? A USDA construction loan allows you to buy land and build your dream home, as long as you meet eligibility requirements. This USDA loan combines the land purchase, building, and permanent mortgage all in one, giving you a once-a-month payment. The best part? In many situations this loan comes with the option for 100% financing.
In addition to no down payment, the interest rates of USDA construction loans are fixed and low, making them affordable. And being insured by the USDA makes the insurance affordable as well.
This loan can cover:
- Buying a lot
- Contingency reserves
- Reasonable construction administrative costs
- Inspection fees
- Other necessary components.
Remember – in order to qualify for a USDA construction loan, you must meet property and income eligibility requirements. The home must be in an area that is considered more rural, and there are household income caps in place as well.
Jumbo Construction Loan
We also have loan options for borrowers that want to build a custom home above the conforming loan limit of $548,250. These types of loans are called jumbo construction loans. With these loans, you will need a bit higher down payment, however we have loan options with as low as 15% down payment required up to $1 million dollars. We also have loan options up to $3 million dollars for large jumbo home loans. These loans can be complex, however we are experienced in originating jumbo loans and can walk you through the loan process to make it a smooth experience for you.
Renovation Construction Loan
A renovation construction loan is slightly different than a conventional construction loan in that a renovation loan is designed for just that, a renovation. These are loans you can get if you are looking to purchase a home and renovate immediately. This means one loan covers both the purchase price and the remodeling costs, removing the need to seek funding for each aspect, which means only one monthly payment.
There are many different types of remodeling which can be done with funding through a renovation construction loan. These include:
- Buying new appliances,
- Getting new windows, doors or floors,
- Replacing or upgrading your plumbing, electrical, heating or cooling systems,
- Redesigning your kitchen or bath,
- Landscaping or adding a deck.
With a renovation loan you can skip the build process while still getting your custom dream home.
There are many different options available to help turn your dream home into reality. When you choose us as your lender, we will walk you through each step of the way, answering your questions and holding your hand. Plus we get you funded fast! Contact us today to get started.