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Three Things to Consider When Taking Out a Home Construction Loan

When building a new home, or upgrading an existing one, the financial aspect is the most basic, right? Without money, nothing gets built. Unless you’re very fortunate, you’ll need a loan to finance the project. So, what kind of home construction loan do you need? What are the benefits and potential pitfalls of such a loan? The success or failure of your project can depend entirely on you getting the right kind of financial help and knowing exactly what you’re getting into.

1. Ensure You Have a Detailed Contract

All business transactions require comprehensive documentation, especially for long-term and expensive processes – like building your home. It’s essential that all project costs be documented, as well as  all parties’ obligations, well before construction starts. This may seem obvious, but the more detailed proposals you can take to the bank, the better for your home construction loan application. Banks like details and assurances that all will go well. They don’t like vague concepts and unclear paper trails. In this area, your bank can actually help you. It will set out precisely what information you and the construction company must provide.

Be certain that the estimate and proposed building contract include everything, right down to the tiniest details about baseboards, door handles and switch plate covers. There should be no surprises later. Even seemingly insignificant omissions can morph into larger expenses later – something you may not have planned for in the financing.

2. Understand the Various Loan Types

There are different types of home construction loans available. Consider them carefully to ensure you have what is right for your needs. One size does not fit all.

• One-Time Closing Loan. Also described as a “construction-to-permanent” loan, this type automatically converts to a standard mortgage after construction is complete. You can reduce your closing costs by combining the costs of land, construction and the house into one amount. The downside is you won’t be able to shop around for a lower mortgage rate after the construction is completed.
• Construction Only Loan. As the name suggests, this covers the financing only for the construction work. Usually ranging from 6-to-12 months in duration, a construction only loan requires an upfront payment. Once construction is complete, you can then apply for a mortgage. The benefit to this kind of loan is you can shop around for more affordable mortgage financing and interest rates through different lenders.

3. Learn the Pitfalls

We know there are always potential pitfalls that could impact your return on investment. After all, a home construction loan significantly impacts your finances; even more so if something goes wrong. It’s not often that something goes terribly wrong. The horror stories are the exception instead of the norm. But many unexpected things can turn up when breaking new ground and building a home. What happens if the job doesn’t go to plan? Do you have a contingency? You must also consider overruns with the building costs. Do you have the financial flexibility to invest additional funds at short notice? Find out how to deal with these things in advance, so you choose the right kind of home construction loan for you.

“Romney Tripp started construction in 1977 and formed RWT Design & Construction in 1992, eventually setting up the shop in Burbank. From the mid 1980’s Romney has been working on building recording studios as well as…” Read more.

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