What You Need to Know About Construction Loans When Buying a House in Westfield, Cranford, Clark, Scotch Plains and Fanwood Areas

What You Need to Know About Construction Loans When Buying a House in Westfield, Cranford, Clark, Scotch Plains and Fanwood Areas

Sometimes you just can’t find that dream home that checks all your boxes. So what do you do? Many people have a custom home built, and others buy an existing home with plans to remodel extensively and turn it into their dream. In either case, they’ll need a construction loan – and that’s a different animal from a standard mortgage loan. So here’s what you need to know about construction loans when buying a house in Westfield, Cranford, Clark, Scotch Plains and Fanwood Areas.

What Is a Construction Loan?

So, first, let’s see exactly what a construction loan is with respect to buying a house in Westfield, Cranford, Clark, Scotch Plains and Fanwood Areas . . . 

“Construction loans are shorter term, higher interest rate mortgages that cover the cost of building or renovating a home. The advantage is you can draw from the loan as needed. The lender pays a construction loan to the contractor — not the borrower — in installments as building milestones are achieved. Often the bank will send out an inspector to verify the progress. When the building is complete, home construction loans are either converted to permanent mortgages or paid in full.”

The great thing about a construction loan is that it allows you to have everything you want in your home. You’re not limited to only what you get in an existing home. But the construction loan process can be fairly complicated. You can find out even more by contacting a Westfield, Cranford, Clark, Scotch Plains and Fanwood Areas agent at 917-608-7277.

Construction Loan Types

There are several types of construction loans, each with a different purpose. As they relate to buying a house in Westfield, Cranford, Clark, Scotch Plains and Fanwood Areas, these types are as follows:

CONSTRUCTION-TO-PERMANENT LOAN

This type of loan does double duty by providing financing for both the construction and your permanent mortgage. “In other words, with a construction-to-permanent loan, you borrow money to pay for the cost of building your home, and once the house is complete and you move in, the loan is converted to a permanent mortgage. The benefit of this approach is that you have only one set of closing costs to pay, reducing your overall fees.”

CONSTRUCTION ONLY LOAN

As the name suggests, this type of construction loan provides funding only for the construction portion of buying a house in Westfield, Cranford, Clark, Scotch Plains and Fanwood Areas. “The borrower is responsible for either paying the loan in full at maturity (typically one year or less) or obtaining a mortgage to secure permanent financing . . . The funds from these construction loans are disbursed based upon the percentage of the project complete.”

RENOVATION LOAN

This type of construction loan applies to buying a house in Westfield, Cranford, Clark, Scotch Plains and Fanwood Areas that you want to extensively remodel or upgrade. A renovation loan can take any of several forms, so if you intend to go this route, contact your Westfield, Cranford, Clark, Scotch Plains and Fanwood Areas agent at 917-608-7277 to find out more.

OWNER-BUILDER LOAN

“Owner-builder loans are construction or construction-only loans where the borrower also acts in the capacity of the home builder.” The problem with this type of loan is that in most cases the lender will require the owner also to be a licensed contracor.”

How Does a Construction Loan Work?

A construction loan is different from the traditional mortgage loan you would get for buying a house in Westfield, Cranford, Clark, Scotch Plains and Fanwood Areas. Here are some of the differences you’ll encounter with a construction loan:

  • Variable rates that move up and down with the prime rate
  • An Interest only option. Some lenders will allow owners to pay just the continuing interest on the outstanding balance during the construction period
  • Higher rates than with traditional mortgage loans because there is no existing home to serve as collateral
  • Requires “a construction timeline, detailed plans, and a realistic budget”
  • Money paid out by lender in stages according to construction progress

Construction Loan Considerations

Now, if you decide to get a construction loan, there are a few things you need to keep in mind, such as:

  • Will you encounter any factors, such as bad weather, that can put the construction off schedule?
  • Will you need to obtain more than one loan to complete the project?
  • How much will closing costs and other fees be if you have to get more than one loan?
  • Do you have or can you get the funds to purchase the land to construct your home on?
  • Did you budget for overages? Most projects go 10% over original estimates

Getting It Right When Buying a House in Westfield, Cranford, Clark, Scotch Plains and Fanwood Areas 

So if you can’t find your ideal home, your dream doesn’t have to end there. You have the option of getting a construction loan and building your dream home from scratch or turning an existing home into your dream home. You have several construction loan options to choose from to help you realize your dream.

It’s just that a construction loan is a specialized kind of loan and may require more effort and stricter qualification – even if you’re buying a house in Westfield, Cranford, Clark, Scotch Plains and Fanwood Areas to remodel and/or upgrade. Be sure, then, to consult a Westfield, Cranford, Clark, Scotch Plains and Fanwood Areas agent to find out the best construction loan option for your needs. So if you’re looking into a construction loan as part of your plan for buying a house in Westfield, Cranford, Clark, Scotch Plains and Fanwood Areas, contact us today at 917-608-7277.

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