Construction home loans are designed to cater to your needs for funds to build or renovate your home. The way your construction loan is set up determines the varying conditions that require being met throughout the construction of a home, which can seem like an overwhelming ordeal taking into consideration the amount of things to consider.
It is important to remember that a construction loan will only cover the costs of major renovations of a property. It will not take care of the purchase of land or any other mortgage that you might have. For this, you would require a separate and secure home loan, though you can club them all into one mortgage once the building phase gets over.
An essential aspect for getting accepted for a construction loan is your ability to service the loan. Two important things that need to be assessed to gauge your ability to pay the construction loan are as follows.
- Any current debt on the land loan.
- Your ability to service a construction loan as it’s being drawn down for progress payments. If needed, then a lender will also review your ability to service the loans once they are combined.
If you want to ensure being eligible for a construction loan, then you must keep in mind that your credit history must be clean and that too before you apply. A construction loan is a very different product from other loans because of which lenders need to assess their risk more carefully. Another reason is that construction loans are interest-only loans. This indicates that you would only pay the interest portion on the amount being advanced although this will depend on your lender.
Construction loans are a great asset while building a home, as it frees up personal cash flow, allowing you to deal with other important things like interior design and other decors around the home of your dreams.