The Process of a Construction Loan vs. a Mortgage Loan
What’s the loan process look like for a construction loan versus a mortgage? Mortgage lenders have different requirements from one another. Still, the construction loan process is generally a little more detailed and requires a few additional steps in approving the builder and contract. In contrast to a conventional 30-year mortgage, a construction loan phase often lasts less than a year before it is modified into a fixed-rate term. Despite the additional detail required for a construction loan, ProFed simplifies the process for borrowers with their one-time construction closing.
A construction loan is a short-term loan used only for building construction, and as such, they sometimes carry a higher interest rate. Unlike competitors, though, ProFed does not have a higher interest rate for construction loans; they offer them for the same rate priced as a conventional 30-year mortgage.
Compared to traditional mortgages, where 30-year loans are the norm, construction loans have very short periods, usually 6-12 months, before a modification converts them to the fixed rate principal and interest.
You must fulfill the lending institution’s criteria to get a construction or mortgage loan. Requirements will vary by lender.
Certain conditions must be met before a ProFed lender will approve a construction loan, including:
Mortgage eligibility criteria at ProFed often include the following:
*Additional requirements for specific mortgage types may apply
Construction loans, like mortgage loans, have varying down payment requirements. Many lenders need at least a 5% down payment, while others may ask for 20% or more. ProFed requires a minimum 5% down payment for construction loans and as little as 0% for conventional mortgage loans.
An increased level of lender participation is typical with construction loans. After reviewing your predicted budget projections, precise building plans, and construction timeframes, the lender will base their decision on your requested loan amount. Approved funds are dispersed to the contractor regularly during the project duration.
For the lender to release any more money, the appraiser must first assess the current state of development to ensure that the expenditures match the work completed so far.
Construction loans typically offer a one-time construction closing for borrowers meaning they can close the construction loan and permanent financing of the new home simultaneously.
Mortgages and construction loans serve different purposes, and knowing the difference will help you decide which is right for you. ProFed Credit Union is available to assist you with purchasing or selling your house. Our mortgage experts will work with you every step to provide a smooth and stress-free experience, whether you are a first-time buyer or want to refinance your current mortgage.
To help you reach your goal of building a house, we provide construction loans with fixed rates and one-time closing. Please reach out to us to find out how we can help.