Does A Construction Loan Turn Into A Mortgage?
When building a home for yourself or someone else, you will need funding for potential land, building supplies, and labor. This is where a construction loan comes into play. However, you have to wonder, does a construction loan turn into a mortgage once the building is complete and you're ready to move into the house? Let’s dive into the options available to you.
A construction loan is a short-term loan, generally for around a year, designed to cover the costs of constructing a new home. These loans are typically offered at a higher interest rate than a traditional mortgage, and you must make monthly payments even if you are paying rent or a mortgage during the construction phase of your home. At ProFed, we offer construction loan rates comparable to a conventional 30-year mortgage - see current rates.
There are primarily two types of construction loans to consider: construction-to-permanent and stand-alone construction loans.
A construction-to-permanent loan provides comprehensive funding to build a custom home, including the land cost, supplies, and labor. This loan operates in two phases: during the construction phase, you make interest-only payments, and once the home is complete, the loan transitions into a permanent mortgage.
In contrast, a stand-alone construction loan covers only the construction phase. Monthly payments are required throughout construction, but the entire loan amount is dues once it's complete. Unlike the construction-to-permanent option, this type of loan does not automatically convert into a mortgage. Borrowers must either secure a new loan or have sufficient funds available to pay off the stand-alone loan.
Applying for a construction loan can be more complex and time-consuming than securing a traditional mortgage. Lenders typically require additional documentation, such as building plans for the home, a proposed timeline, and information about the builder or contractor you plan to use. You'll also need to demonstrate that you can manage the construction loan payments alongside your current housing costs. Requirements will vary by lender but be prepared to pay anywhere from 5% to 20% for a down payment. Despite the complexity required for a construction loan, ProFed simplifies the process for borrowers with their one-time construction closing.
Here's the breakdown of the specific conditions that must be met before a ProFed lender will approve a construction loan, including:
Before applying for a construction loan, a potential homeowner needs to understand the benefits and considerations.
A construction loan allows you to build the custom home of your dreams. However, there are other benefits to obtaining this type of loan.
As with everything, there are things to consider with a construction loan instead of buying a home with a traditional mortgage. Here's a look at a few of the considerations.
At ProFed, we enjoy helping our clients build their dream homes. Our team can work with you throughout the process of applying for a construction loan and beyond. ProFed services all mortgage loans locally and throughout the lifetime of the loan. We're always ready to answer your questions. Contact us today.