A home is one of the biggest financial investments you can make. While pre-built homes are readily available, building a home from scratch gives you the freedom to customize it to the exact design and build you want. Construction loans help you finance your building process from start to finish, turning your dream home into reality. Knowing your options, requirements, and process can help you plan your dream home more efficiently. Here, we cover how construction loans work, what to look out for, and how you can start the process with Steiner Homes today.
Types of Construction Loans Available in Indiana
There are various types of construction loans. Here are the two most common ones:
Construction-to-Permanent Loans
A construction-to-permanent loan is the most common loan option available. Also known as a one-time or single-close loan, it converts into a traditional mortgage after your house is built. The loan has two phases, including during the construction and after completion.
During construction, the lender will cover the costs needed to build your house, including the cost of land, labor, permits, materials, and more. You make only interest payments during the construction phase. After completion, the loan converts into a traditional mortgage with principal and interest payments.
Stand-Alone Construction
The stand-alone construction loan involves two separate loans for construction and mortgage. The stand-alone construction loan will cover the construction costs, but it doesn’t convert into a mortgage after the building is complete. You’ll need to apply for a new long-term mortgage to pay off the construction loan.
How Construction Loans Work: The Complete Process
Instead of getting the full loan amount upfront, you receive the funds in stages as each phase of construction is completed. Here’s a quick guide to how it works:
Pre-Approval and Builder Approval
First, you apply for the loan when you’re ready to build your house. You’ll need to submit several documents, including your credit information, building plans, budget, and timeline. You’ll also need to work with a licensed builder like Steiner Homes to get approved.
Appraisal Based on Plans
After approval, the lender will assess the projected value of your house once the construction is done. This includes reviewing your project details.
Loan Closing and Draw Schedule
After the approval, both the lender and the builder will agree on a draw schedule. A draw schedule states when your builder will receive payments based on construction stages. An inspector will verify each milestone before releasing the payments.
Conversion to Permanent Mortgage
If you decide to go with a construction-to-permanent loan, your construction loan will be converted into a mortgage after your house is done.
Construction Loan Requirements and Qualifications
Construction loans require a little more than a traditional mortgage. Here’s what you’ll need to get approved for one:
Good Credit Score
A good credit score is important for most loans. You’re looking at a minimum of 680 for a credit score, but a score of 720 or higher can help you score lower interest rates.
Proof of Income
Lenders will want to see proof of income before approving you for a loan. This includes your monthly earnings and a view of your other existing debts, such as student loans or car payments. To get approval for a construction loan, many lenders look for a debt-to-income ratio of 45% or lower, though requirements may vary.
Down Payment
For a construction loan, be prepared to pay up to 25% of the full build price as your down payment. This is higher compared to your standard mortgage, since the lender takes on more risk with a construction loan.
Detailed Paperwork
Lenders want to be sure that you’ve properly budgeted and planned for your house. To get approved, you’ll need to submit various paperwork on your construction plans, including:
- Detailed timeline and budget
- Blueprints and materials
- Signed contracts with a licensed and insured builder like Steiner Homes
- Estimated value of the finished home
Advantages and Challenges of Construction Loans
There are several advantages and challenges when you apply for a construction loan:
Here are the advantages:
- Freedom: You build your house from scratch, allowing you to design it and choose the materials you want.
- Interest-only payments: You only pay interest according to the draw schedule.
- One-time closing option: You can save on closing costs by choosing a construction-to-permanent loan.
Here are the challenges that come with a construction loan and how to overcome them:
- More documentation: You’ll need more paperwork, but working with a trustworthy builder like Steiner Homes helps you get everything you need easily.
- Stricter qualification requirements: You’ll face stricter requirements because construction loans carry more risk, so maintaining a good credit score is essential.
- Longer process: The process takes longer since you’re building a house from scratch, but working with a trusted builder like Steiner Homes gives you clear schedules and regular check-ins for a smoother process.
Steps to Apply for a Construction Loan in Indiana
Here’s how you can apply for a construction loan:
- Set a budget: Decide on how much you’d like to put down on your dream home before meeting lenders and builders. Consider how much you’d like to pay on a down payment, monthly payments, and the costs needed for your home’s features and design.
- Choose a builder and finalize plans: Choose an experienced builder you can trust, such as Steiner Homes. We will work with you to confirm your building plans, materials, cost estimates, timeline, and more.
- Get approved: Submit the paperwork to the lender to find out your loan amount. The lender will then appraise the documents and approve your loan accordingly.
- Close the loan: Sign the closing documents and start building your home!
Contact Steiner Homes Today
Your dream home is 100% achievable with a trusted builder and a solid construction loan. Ready to start? Contact Steiner Homes today to speak to our team. We can help you navigate loans, build plans, and get everything you need to fund your new home build.
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