How to Secure a Construction Loan
Most people know that you can get loans to buy an existing home. But what if you want to buy a new house?
The process for applying for construction loans does differ from that of a home loan, but the basic structure is the same. To get a construction loan, you must follow these steps.
Step One: Gather Your Documents
As with a home loan, you’ll need to have evidence of your financial situation, including documentation of your income flow and your outstanding debts. But you’ll also need a building contract that outlines the construction stages and a drawdown schedule. A drawdown schedule lists the amount of money you’ll need for each stage of the building process, as construction loans do not pay a lump sum. Along with these documents, you’ll need to give the lender an estimated build time and a copy of the building plans.
Step Two: Secure Pre-Approval
Although you probably have big plans for the house you want to build, it’s best to get pre-approval before you start hiring contractors. Once the lender has the documents they need, they will assess your situation and extend credit to you for a particular amount. In most cases, pre-approval letters are good for 90 days.
Step Three: Hire Contractors
After you know how much money you can work with, it’s time to hire a builder and start purchasing materials. Because surprises come up in any large-scale project, you’ll want to include a clause in your contract that covers any unexpected costs.
Step Four: Communicate with Lender
Unlike a home loan, in which the lender pays out a lump sum which the borrower slowly pays back, a construction loan gets paid out in increments. Each time a project hits a new milestone, the lender makes a payment to cover it.
For that reason, you and your builder must stay in contact with your lender, to give them progress updates and follow the payment schedule. Often, the lender requires inspections at each step to make sure that their money is being used wisely.
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