Acquiring a home can be done in two ways. First is by purchasing a pre-built house using a mortgage home loan, and the second is by building your house from scratch with the help of new construction loans texas. Both processes have their advantages and disadvantages. However, if you plan to achieve your dream house, then applying for a construction loan from new construction loans texas is the best choice you can have.
However, it would be best to know some essential things about a construction loan before you apply for one and here are some of them.
Construction Loan Definition
A construction loan is a type of short-term loan where lenders lend their borrowers money to fund their home construction or home renovation. The good thing about this type of loan is that lender won’t charge their borrowers their monthly dues, and they will only require the interest as payment.
They will give their borrowers a maximum of 12 months to construct the house before they add the principal amount in the total amount that their borrowers needed to pay. However, the borrowers can also opt to pay the loaned amount in full after the home construction or they convert the loan into a permanent mortgage.
Construction Loan Coverage
The coverage may vary depending on the project, but here are some of the basic coverage a construction loan can cover.
- Closing costs
- Contingency reserves
- Interest reserves
Types of Construction Loans
A construction loan comes in three types. First is the Construction-to-Permanent Loan, second is the Stand-Alone Construction loan, and the third one is called Renovation Construction Loan.
Commonly known as One-Time-Close Construction Loans, this type of construction loan benefits aspiring homeowners who have a definite timeline and straightforward construction plans at hand. Also, it comes with a fixed interest rate, and it is convertible to a permanent mortgage after the completion of your house. It is also a lot easier to get loan approval with this type of loan compared to Stand-Alone Construction Loan.
Stand-Alone Construction Loans
Unlike Construction-to-Permanent Loan, first, you need to get qualified for the loan before you can apply. Also, you have to pay the full amount of the loan once the construction of your home is complete. You also need to pay the closing cost twice.
Compared to Construction-to-Permanent Loan, the interest rate for this type of loan if unpredictable, and it can change even the construction of your home is still on-going. With this, there is a risk of paying higher interest rates after completion. Also, this type of loan is commended for aspiring homeowners who have a significant amount of cash reserves.
Renovation Construction Loans
Not all Construction Loans can only be used for building a house from scratch. You can also use this loan for home improvement and renovations. It is a type of loan that benefits homebuyers that purchased a pre-built house that needs improvement to cater to their needs and home preferences.