A residential construction loan is basically a credit line that the lender sets up on behalf of the homeowner for the payment of subcontractors and suppliers, who really cannot afford to wait until the house is finished for payment of labor and materials they have provided. Before a construction loan can be obtained, though, an application and approval for a residential mortgage must first be made. Residential construction loans can be availed through many different sources. Here are some of these sources and their attributes.
The builder hired for home construction can finance the construction on loan. This will usually mean a higher price quote on the house since the builder gives the quote to its lender before the duration of construction is known. The builder has to assume a longer period in order to cover the risk. Taking this option assures the homeowner that the builder is financially capable to accomplish the job. In addition, since the builder is paying interest on the construction loan, it is spurred to get the job done quickly.
Banks (and other lending institutions, as well) consider residential construction a market for excellent business and are always hungry for such ventures. They offer a range of loan offerings with respective rates and terms to choose from. However, these institutions are often wary to stick their neck out considerably without some guarantees.
Construction loans are called story loans because bankers or other lenders would want the story of the construction plans before they are willing to loan the money. They would want to know details on where the home will be built, how it will be built, schedules, the cost, and estimates – a complete construction package of the home proposed for construction. Banks are frequently very hesitant to grant the loan without the involvement of a licensed contractor. Lastly, chances of getting the loan are upped if the homeowner actually owned the land, which the bank will then take as collateral.
Many construction companies offer financial packages for residential construction loans packed with incentives. However, this does not make them the best deal in the subject of residential construction loans, and homeowners would best compare these offers with that of other opportunities.
Government Assistance Programs
There are many government programs that offer residential construction loans or assistance or both in the U.S. Such programs include offers for down payment assistance for low to moderate income home purchasers and special home loan programs for veterans, teachers and law enforcers. State housing banks propose different homeownership programs like fixed-rate mortgage loans at lower interest rates than regular home loans.
Some programs fund local public agencies and private entities to produce affordable housing or make loans. The Mortgage Credit Certificate (MCC) Program involves income tax reduction and net earnings increases, which thus allow a buyer to easily qualify for a mortgage.
Private, government-sponsored enterprises like Freddie Mac and Fannie Mae also exist to provide financial services and products through savings and loans and mortgage bankers to low to moderate income families, especially in rural and underserved areas. Freddie Mac and Fannie Mae extend their services online in providing tutorials and other resources on home purchase and loan processes.