New Home Construction Loans Explained | What is a Construction Loan

We’re talking new home construction loans and explaining what are the requirements for a construction loan! We’ll cover how do you qualify and what credit score you need for a construction mortgage.

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0:00 - What is a construction loan
I want to start with what exactly is a home construction loan. We’re talking about where you basically are buying a plot of land and building a custom home versus you buy a new construction home and you’re under contact and you can select the layout. You decide on the builder you want for the home and I like to think of it as, you’re building your dream home, deciding on every detail.

The first thing you need to know is how home construction loans work and the first thing you need to know is that construction loans are going to be a lot more involved with the lender and take some coordination with the builder. Typically on a home construction loan, you will have a lender pay the builder in intervals after certain completions of different phases. During this time, you’re usually only obligated to pay the interest on the loan. Your loan balance repayment doesn’t begin until after the home is completed and the builder has been fully paid. Then it will usually work like any other home mortgage.

2:12 - Types of construction loans
Its important to understand the two main different types of home construction loans because in some cases it automatically becomes a regular mortgage, and in other cases, you have to get a new mortgage. I’ll also be covering FHA construction loans which have some of the advantages of an FHA loan as well.

The first type of home construction mortgage is called a stand-alone construction loan. This is where the loan is only meant for the construction phase, so if the plans just a year, the construction mortgage would be for just that long. At the end of that year, assuming the home was built on time, then you would pay off that construction loan, using a new traditional mortgage.

The benefit to a stand-alone construction loan is that you are able to put more of a down payment later. During the construction period, you don’t have to put as much down payment and you’re only paying the interest, so once the construction is complete, you can secure a bigger mortgage assuming you increased your savings. But there is a cost and that is not being able to lock in your mortgage rate. The interest rate could go up or down before I secure my final permanent mortgage.

The second type of construction loan is a construction to permanent loan. Basically, it combines both parts of the loan, the construction part, and the traditional mortgage part into one loan. You could get a fixed rate, or adjustable, 15 yrs or 30, just like a normal mortgage. Now, the construction to permanent loan allows two things, it allows you to lock in the interest rate and second, it's convenient.

5:36 - Home Construction Loan Rates and Requirements
There are some home construction loan rates and requirements you need to be aware of. Typically you're going to need a 20% to even 25% down payment, now this will depend on if you go with the construction to permanent loan or the stand alone also known as construction only loan.

6:22 - Credit score for home construction loan
In terms of credit score required for a constitution loan and any specific 2021 home construction loan requirements, typically a lender wants a credit score in the 700 or above range, with 680 being the min. And the same thing like any other loan applies here, the better the credit score, the more likely you are to get a better rate.

7:12 - Construction Loan Process
As far as the construction loan process and steps involved, it will be required that you have a builder that is licensed and approved plans and a set schedule for the construction process. It may be required in some cases to have as part of the loan amount, an amount that's meant for contingencies. Really make sure this builder is local, has a good reputation, and that you have proof from others that they are good about upholding their home warranty. The next step is how to choose a contusion loan lender.

9:18 - FHA construction loans
There is something known as an FHA construction loan and the benefit here is that it offers the advantages that a regular FHA loan would be. For example, getting approved with a very low credit score, I recommend talking to an approved FHA construction lender. A new construction home is more expensive than a regular home, and most people that use an FHA loan, either are making financial mistakes, or have made financial mistakes in the past.

Hopefully you have enjoyed this video on new home construction loans explained and as always, if you have further questions, feel free to comment down below.

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