You’ve decided to take the alternative route and build your dream home instead of buying an existing one.
Surprisingly, you won’t be getting a typical mortgage from a bank or broker.
You’ll be getting a construction mortgage.
If you are new to this process, stick around and learn all the ins and outs about this topic.
WHAT IS A CONSTRUCTION MORTGAGE?
Exactly what the name suggests.
It’s a loan given to an individual who wants to build their home from the ground up. Through this loan, new homeowners will receive financing for all construction materials and contractors needed for the project.
Only interest is paid on the amount loaned over the construction phase.
This amount is usually paid out in different increments throughout the process. After the building period is over, the amount becomes due and it changes into mortgage.
Interest on these kinds of short-term loans are much higher.
Whereas typical home financing is based on the market value, construction loans are based on the value of the project at hand.
WHAT IS A LOAN BROKER?
This is a person or company that connects home owners and property developers with financing lenders.
Naturally a loan broker doesn’t lend any money to home owners, but rather find a financial institution that provides the lowest interest fees and rates for their client.
THREE TYPES OF CONSTRUCTION LOANS
Depending on what suits your finances and planning best, there are three different types of money loaning you can apply for.
- Construction only: Once the building is complete, the loaner is liable for the full amount. The money only covers the building process and not the mortgage of the home after the build is complete.
- Construction to permanent: As the work on the home construction is complete, the bank will pay the contractors. Once the building is completed the costs are calculated and converted to a mortgage loan.
- Renovation: If you have the determination (and guts) to buy a fixer-upper home, then you’re going to need renovation financing. The projected cost of the renovation is added to the purchase price of the home and then a mortgage is calculated.
Signing up for any of the above-mentioned financing, will support the lender in finishing the project within the timeline. Sometimes construction might be delayed when developers don’t have a proper cashflow.
Learn more about quality construction mortgage services here: https://www.geoffleemortgage.com/mortgage-services/construction-loan-broker/
HOW DOES IT ALL WORK?
There are many factors that play a role in how much you’ll be able to borrow from a financial institution.The broker is the professional who will be able to review your financial history and then apply according.
Looking at your annual income, debt and credit, assets, and any other investments an amount will be agreed upon between the broker and the financial institution.
An agreement will be written between the two parties which will state details of the building project.
This include information such as start and end date of construction, overall amount of cost of contractors, and other expenses that will be undergone throughout the process.
Because construction loans are paid out in increments, the bank will be responsible to pay builders and other contractors throughout the duration of the process.
The financial institution does investigate building sites, to ensure that the process is following plan and that the builders are performing as stated in the agreement.
It’s therefore important that you pick the right builder who is experienced in working with time limitations, and within budget. Preferably someone who are familiar with rules and regulations within mortgage construction loans.
BENEFITS OF HIRING A BROKER?
There are many benefits to hiring a broker, here is a list of the most important ones:
Advice and Recommendations: Brokers have a very objective view on finding financing.
They aren’t linked to a specific institution and therefore have access to a wide product range and offers from financial institutions.
They’ll be able to give you advice on finding the perfect lender on the market for your specific project. Avoiding an instance where the borrower signs an agreement that’s not beneficial or fair.
Saves Time and Money: Brokers are experienced in handling all documents, contracts, and applications.
Therefore, saving you loads of time and money running around looking for the right contacts.
Use your time looking for property and designing your dream home, while the broker does all the nitty gritty stuff.
Negotiation: An experienced broker will know what kind of interest rates and deals are the best options. Their job is to find affordable prices that is beneficial to you and them.
Leaving the negotiating up to them, will relieve stress from your shoulders while getting you the best terms.
Read this to find out if it’s better to work through a construction mortgage broker or not.
There’s No Costs Involved: This might seem impossible, but brokers don’t have a fee and you don’t have to pay them.
They are usually paid 1-2% of the amount loaned from the financial institution.
This arrangement is relieving to the lender, as it ensures that the mortgage broker will make sure that they find an agreement with the best terms and rates.
If you want to start building your dream home, then finding a construction and mortgage broker will be in your best interest. Not only will the operation flow smoothly, you’ll also save a lot of time and money.