When it comes to buying a property, you will have to apply for either a residential mortgage or a commercial mortgage. These two mortgages are available when you are purchasing a well-built, accommodating house. What if you are buying a piece of land or a ramshackle building that you want to knock down to create a new building from scratch? Do not worry, as here comes the construction finance.
A construction loan is a short-term financing that helps cover expenses such as labour costs and construction materials. If you already own the land, you can use it as collateral to take out a construction loan. These loans are generally secured and paid off within a period of 12 and 18 months.
Lenders will peruse your application thoroughly, as a whole house is not secured against the loan. In addition to your financial statement, they would like to look at your architectural plans. You will have to provide an estimated timeline and budget.
After the approval of a construction loan, you will not receive all funds in one go. Draws are made based on the complete stages of construction. The construction must be completed within the given timeframe and an inspector of a lender will evaluate the status.
You will just keep paying interest, not the principal amount. Most of the lenders will allow you to convert it into a mortgage. If not, you can apply for a mortgage and terminate your construction loan.
How do you compare construction finance deals?
Finding the best construction finance deals is a bit of a time-consuming process. You will need to compare the deals offered by different construction finance providers. Here is how you can compare the best deal:
Interest rates, fees, accessibility, and customer support are the four factors based on which you should make a comparison.
- Interest rates
Interest rates vary by finance-providing company. Though lenders will make your credit rating and financial situation responsible for high-interest rates, you will likely find that each lender perceives different levels of risk from your application. Therefore, the best way is to get a pre-qualifying letter from multiple lenders.
With the help of a pre-qualifying letter, you will be able to get the estimated interest rates. Visit the comparison website and compare interest rates. They are not the actual rates, but they are worth deciding which one you should choose.
- Fees
In addition to interest rates, you should watch out for fees they charge. The fee structure varies by construction finance company. The bifurcation of fees will be given in the contract, but the processing and loan origination fees will be quite high. As the loan will be disbursed in stages, you will have to pay fees every time. Find details about it before making any decision.
- Accessibility
The next thing you should look at is the accessibility. Each lender has their own criteria to decide how much money you should be given. You should try to find a finance company that is flexible. Most of the companies do not release funds quickly, and they also restrict the loan size. Try to choose a lender that lets you access money without further ado.
- Customer support
Construction loans do not work the same way as other loans do. As money is released in stages and an inspector evaluates the completion stage, you will have to be in touch with your lender. Make sure that you get full support from them. Customer support enables smooth lending.
If you are looking to find the best construction finance deals, you should consult a broker. They will help you find the company that matches your requirements. They know that not all companies have specialised in offering both residential and commercial property construction.
For instance, if you want money for a residential property, they will introduce you to companies that have experience in providing residential construction. Likewise, they will arrange a commercial property finance provider if you need money for a commercial property.
How to get the best construction finance deals
Bear in mind the process of getting a construction loan approved is tougher than a mortgage. A lender will carefully review your architectural plans and estimated construction timeline. Here are the tips how you can get the best construction finance deals:
- Your credit score must be good
It is actually arduous to get the nod for a construction loan when your credit rating is bad. You should try to have a good credit score. Find out how much minimum score your lender wants to accept.
- Enough income
You will need to prove that you have a solid income source. Even though the construction loan could be transformed into a mortgage or paid off once and for all, your strong financial statement serves as an essential basis for deciding whether you get approval, so no lender will sign off if your income sources are not good enough.
- A larger down payment
You will need to put down the deposit at least 20%. However, it is a good idea if you increase the deposit size. The bigger the deposit, the lower the interest rate will be. Your lender will charge competitive interest rates when the loan amount is whittled down.
- Other factors
There are some other factors that you should look at in order to get the best construction finance deals:
- Choose the right type of construction loan
- Know about closing costs and associated fees
- The type of interest rates you will be charged – fixed or variable
- What if there is a delay in construction?
- What if the cost of construction suddenly goes up?
The bottom line
There are a lot of construction finance companies, but you will need to spend some time researching to pick the company that offers the best interest rates. Take the help of a broker in case you find it hectic to do it alone.