What is a Construction loan?
Many Americans dream of building their own home, but construction costs are not cheap. A construction loan is a type of loan that people can use to borrow money from banks and lenders to cover the costs of building a home.
Who qualifies for a construction loan?
Construction loans are risky for lenders because there isn’t any inherent collateral until the home is constructed and is up-to-code. As such, requirements for construction loans are more stringent.
Here is a list of the requirements that lenders typically require to approve a construction loan:
• A licensed contractor with a strong resume must be signed onto the project (our Construction Department at Citywide Home Loans can assist with this)
• A comprehensive construction plan needs to be developed and shown to the lender
• The projected home value must be approved by a licensed appraiser
• At least a 20% down payment is required (and sometimes higher)
• Obviously, a high credit score is necessary
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Draws
A construction loan is divided into draws for each section of the construction process where the contractor will be granted different portions of the loan. For example, building the framework and building the roof could be done with different draws. This is done to mitigate some of the lender’s risk. Call our experts today, to see if you quality for a construction loan!
