When financing your family home construction project, you must have a plan. Unfortunately, banks often shy away from working with non-professionals or owner-builders because they are worried about potential problems or delays. Fortunately, you can avoid such problems and delays by having a flexible plan.
Preapproval
A preapproval letter can help determine how much you can borrow to build a family home. It will also help you to establish your homebuying budget. When you apply for preapproval, you will need recent pay stubs and other proof of income. You will also need to provide recent bank statements of other assets. A preapproval letter will be good for 60 to 90 days.
Getting preapproval for a construction loan is not as straightforward as obtaining a standard mortgage. For one, a standard mortgage requires you to provide collateral, while a construction loan doesn’t require collateral until your new home is completed. Additionally, you will have to submit more documents than a standard mortgage, including financial information, length of business, and licensing documentation. Having all of this documentation prepared will help speed up the process.
Down payment
Obtaining a construction loan for a family home requires a down payment that varies based on the type of loan. Generally, a down payment of twenty to twenty-five percent is required. In addition, most loans require a credit score of 620 or higher. Applicants must also provide their cash for the down payment. The good idea is to begin saving early on for this purpose.
While construction loans are ideal for substantial renovations, they have strict requirements. A lender will want to see that the renovation will add value to the home before approving the loan. They will also want to see the construction timeline and draw schedule. Fortunately, other loan options require a lower down payment. For instance, a personal loan is easier to secure and can offer better terms. It can also have a fixed interest rate.
Interest reserve
The interest reserve is a key consideration when obtaining a construction loan for your family home. Interest reserve is the amount of the loan you borrow that will be left over at the end of the construction period. A good rule is to reserve 50% of the loan proceeds. However, your construction project can go higher with many front-loaded construction costs. You need to set aside the number of interest reserves based on your total loan proceeds and construction draw schedule.
The amount of the interest reserve can vary from lender to lender. Some lenders will quote higher rates for a higher interest reserve, while others will have lower interest reserves. You should know that interest reserve is a “feel” factor and is one of several levers lenders use to mitigate risk.
In conclusion, if you’re ready to get a construction loan for family home, keep a few things in mind. First, make sure you have good credit. Second, be prepared to provide documentation of your financial stability. Third, be realistic about the amount you can borrow, and fourth, always contact a reputable lender before making an application. Finally, be patient – the process can take some time, but it’s well worth it to get the home of your dreams!