What You Need to Know About Lot and Construction Loans
Congratulations on taking the first step towards building your dream home! As you begin this process, one crucial decision awaits – choosing the perfect loan. Whether you require a construction loan, a lot loan, or both, it’s vital to understand your options thoroughly. Doing so will ensure you obtain the ideal loan for your specific needs, allowing you to make an informed and confident decision.
Lot or Land Loans
If you’ve already found the perfect plot of land for your dream home, a lot or land loan becomes an attractive option. However, securing this type of loan can be challenging due to unfavorable terms, such as a higher down payment (around 30%) and interest rate. Moreover, additional borrower commitments and underwriting are necessary. So, while cash payment is ideal, community banks and local credit unions may provide better terms when cash isn’t feasible. Explore all the available offers to find the best fit for you.
Pre Approval Process
When securing a loan for land or construction, being financially prepared and obtaining pre approval is crucial. For a lot/land loan, you’ll need a substantial down payment of 20 to 30 percent, a solid credit score, a low debt-to-income ratio, and cash reserves. As for a construction loan, you’ll need all the requirements mentioned earlier, along with detailed specifications for your custom home, including projected project costs, an experienced and licensed builder, and an appraiser’s estimated home value based on the plans. One tip to remember is that working with a builder before purchasing land can result in better interest rates and faster loan approvals.
Rather than dealing with multiple loans, lenders now provide package deals that include all the terms for both the short-term construction loan and the mortgage loan. This means that once the construction is finished, the construction loan seamlessly converts into a long-term, permanent mortgage, resulting in a single loan and one closing. With this construction-to-perm loan, you can select your preferred term from the options initially offered by the lender, eliminating the need to requalify for a permanent loan. Another advantage is that the lender issues monetary payments based on a schedule of draws, offering increased control and reducing the risk of financial loss.
Whether you’ve already got the perfect plot of land or are looking for one, applying for a construction loan is the next step. If you own the land, you can use its equity as collateral to finance the construction loan. There are two main types of construction loans for borrowers to choose from:
- Standard Short-Term Loans: With these, you’ll initially secure a short-term construction loan to cover the building phase. Once construction is done, you’ll transition to a long-term loan to pay off the construction loan.
- Construction-to-Permanent Loans: Consider this option for the convenience of a single closing. It combines all the financing you need and seamlessly converts to a permanent mortgage once construction is finished.
When it comes to building your dream home, selecting the perfect loan is vital for your financial stability. That’s why it’s crucial to understand all your lot and construction loan options to make an informed decision. At Gallery Homes, we’re here to assist you every step of the way. Whether you need research, consulting, or help shopping around, our team will help you find the right loan in Volusia County. Don’t wait any longer—contact us today at (386) 260-2069 to get started.