Construction Loan: Invest in Your Dream Home in California with Sprint Funding

Construction loans are a kind of loan used in the financing of a home or other kind of property. These types of loans are typically short-term loans that last around a year or less and are used to provide for the costs of labor and materials for the home or property’s construction. 

This loan generally works as an interest-only loan, which means that the borrower will only need to pay the interest of the loan throughout the construction period. Moreover, the borrower won’t have to start paying the loan back until the construction is finished.

While this can make construction risky for both the lender and the borrower, a construction loan is a great way to finance a new home.

Just make sure to read the terms and conditions of your loan before committing to the loan.

How Construction Loans Work

As mentioned, construction loans are typically short-term loans, which last from six months to as long as one year.

Because they’re mostly interest-only loans, you won’t have to begin payments on the principal of the loan until the construction is finished and you have taken out your permanent mortgage.

Throughout the construction period, you’ll need to provide payments to your lender every month. These payments will be used towards the loan’s interest and construction costs.

Once construction is finished, you’ll have to pay off the entire balance of the loan, along with any interest that may have accumulated.

A good way to do this is by getting a new mortgage — it will have a lower interest rate than a construction loan.

What Do Home Construction Loans Cover?

A construction loan covers the purchase of land and the cost of labor and construction materials. There are also cases where a construction loan is used to finance the cost of permits as well as other fees related to building a new home or even a commercial building.

Construction-Only Loan

This short-term loan will last between 12 to 18 months and is used to finance a home. Developers and home builders usually use this type of loan to get started with the construction of a new house.

Once the construction is finished, you’ll need to apply to get permanent financing.

Construction-to-Permanent Loan

This kind of loan will allow you to finance both the construction of a new house as well as roll the cost of the project over to your mortgage.

This option will allow you to avoid the hassle of having to take out two different loans while helping you to secure a lower interest rate.

Once the construction is finished, the loan will be changed back to a traditional mortgage, where you’ll need to make monthly payments towards your loan, just like a regular mortgage.

Renovation Loan

This loan can be used to finance costs for renovating or repairing a home. Because the house will secure the loan, the interest rate could be lower compared to other kinds of loans.

A renovation loan is useful for financing renovations to increase the value of your home or to finance repairs for the home to keep it well maintained.

Furthermore, this loan can be used for financing your needs for the home, such as new appliances or furniture.

Owner-Builder Loan

These types of loans are aimed at people who want to complete the construction of a house on their own. Because this loan will let you finance the construction of your home, it can be a great option to help you build your dream home without having to pay upfront.

Using an owner-builder construction loan will allow you to use a lump sum amount to use for your home’s construction. Afterward, it will be converted into a traditional home loan where you’ll need to make monthly payments for the loan.

End Loan

An end loan is a traditional mortgage loan that home buyers, investors, homebuilders, and developers may apply for once a construction project is completed. Depending on the specific loan agreement, these can be used for a wide range of purposes.

Some of the most common uses for this loan include funding the construction of new homes or buildings, as well as financing the expansion or renovation of existing structures.

In addition, end loans can also be used for purchasing land for future developments.

Can You Get a Construction Loan for a Home You Plan To Build Yourself?

If you’re looking to build a house yourself, there’s a lower chance that you’ll qualify for a construction loan. You will need to consider applying for an owner-build construction loan, but you may also find it hard to be eligible since lenders are looking for trained and experienced professionals to work on a home they’ll be financing.

Construction Loan Eligibility

This option is an excellent choice for people who want to build the house of their dreams, but not every borrower will be eligible to get a construction loan. To become eligible, a borrower will need to have a good credit score and provide at least 20% towards their down payment. 

Moreover, borrowers will need to present a comprehensive plan for their construction project while showing that they have the financial capacity to see their project to completion.

Borrower Qualifications

Before you qualify for your construction loan, you will need to provide a few things for your lender to consider your application, such as:

• Your credit score
• Debt-to-income ratio
• Your employment history
• 20% down payment
• The value of the property

Construction loans are a good choice for first-time homebuyers since you won’t have to use credit cards, tap into home equity, or take out a personal loan. Because lenders welcome working with first-time homeowners, this also presents an opportunity for building or renovating the property.

Property Qualifications

There are a few conditions that you’ll need to meet before qualifying for your construction loan, including:

• The property is for personal use and is owner-occupied.
• The property needs to be located within an eligible area.
• It should fall within a certain size, where most properties must be at least 1,000 square feet before getting a construction loan.
• The construction standards must meet regulations and construction standards set by the lender.

Minimum Credit Score for Construction Loans

When applying for a construction loan, the minimum credit score requirement is 680, but some lenders might look for a higher credit score such as 720. A higher credit score can help increase your chances of qualifying and may also provide you with a lower interest rate.

Minimum Down Payment Requirements for Construction Loans

For most kinds of construction loans, you’ll need to provide a minimum down payment of 20%. However, there are also construction loans that can work with as little as a 10% down payment, but this will be reserved for borrowers who are experienced and have a great track record.

You can also put down as little as 5%, but you will need to pay interest on the mortgage and the construction loan, which can quickly add up to more money paid over time.

Construction Loan Guidelines in California

There are various factors to consider in choosing the right construction loan when financing a new house in California, such as:

• The amount of equity in the property
• The interest rate
• Construction loans only last for the short term, so you should have a plan in place to pay off the rest of the loan when the project is finished.

Start Your Construction Project Today

If you’re in the market for a construction loan, contact us today to get started!

Since the U.S. economy has roared back since the dark days of the financial crisis, builders in the area of housing have taken advantage by increasing the volume of new home construction.

This situation has also increased the demand for financing house building via construction loans.

Simply put, a construction loan, also known as a “self-build construction loan” is a short-term loan where the proceeds are used to finance the construction of a home or another real estate project.

Its definition feature that is different from normal loan guidelines is that it requires special monitoring and guidelines to ensure that the construction project is completed so that the repayment of the loan can commence.