How do construction loans differ from mortgages?

Whether you’re planning to build a new home from the ground up, or doing extensive renovations on an existing house, there are different financing options available. For a future homeowner, the most suitable choice will depend on the planned location of the property, how long you plan to spend building, and your desired mortgage term.

A construction loan Jacksonville fl provides financing to cover the cost of the materials and labor necessary to construct a single-family or multi-family home. Unlike mortgage loans, which act as collateral against the debt, construction loans are not secured by a house and are instead backed by the financial strength of the borrower. Because of this, lenders typically require higher credit scores and more rigorous underwriting standards for construction loans Jacksonville, fl. They will also want to inspect the architectural plans for the project and provide a detailed construction timeline and budget.

While it may seem obvious that you need to have a clear plan for your construction, many homeowners are surprised to learn that even more details than those typically required for mortgages will be requested for a construction loan. In addition to typical application materials like financial information, income documentation and proof of employment, a construction loan will likely ask for a written contract with the builder detailing their fees and payment terms. Lenders will also want to know if you are planning to sell your current residence during construction, and if so, what you will use the proceeds from the sale for.

Construction loans are generally issued for 12 months, and they can be converted into a permanent mortgage at the end of the construction period. If you choose a construction-to-permanent loan, this will save you two sets of closing costs and interest rates. The lender will evaluate the progress of the construction throughout the process and send inspectors to ensure that work is being completed properly. At the end of the construction, you will begin making payments that include both principal and interest.

The most desirable construction loans are those that will automatically convert into a permanent mortgage after completion. These types of loans are ideal for borrowers who will be living in the home once it’s finished and aren’t interested in constructing an additional residence at a later date. The lender will consider the progress of the construction and issue a permanent mortgage based on their evaluation.

Despite the more rigorous underwriting requirements for construction loans, there are still some similarities to mortgages. You will still need to make a down payment, and most lenders will request at least 20 percent. It’s also important to have a solid credit score and debt-to-income ratio, as these will be considered by the lender as well. Paying off existing debts, reducing your overall credit utilization, and staying current on your bills will all help you qualify for a construction loan. However, these steps can take time and should be taken in conjunction with a professional to ensure that you have a realistic chance of obtaining financing.