Key Points in Construction Financing

Whether you built your previous home and are now considering it again, or will be building for the first time, there are a few key points to consider when thinking about financing the project. That’s because, even though construction loans aren’t necessarily more difficult at the core, they can involve a longer, more intensive process.

Pre-approval is the most important step. It’s how you’ll verify that you can make your homebuilding vision come true based on your ratio of current assets to existing debt. If you’re working with a quality lender, it’s also the point where you’ll be presented with construction financing options so you can select the option that best works for your needs.

Deciding on the type of loan is another major step. While adjustable-rate mortgages, or ARMs, are generally used for construction loans because they provide a lower interest rate during the building process before being restructured into to a longer-term fixed-rate loan, higher income homeowners may also want to consider a 15- or 30-year fixed construction loan to protect against rising mortgage rates over the course of the project, or a two-year jumbo construction loan ($417,000+) that can be modified to a 15-, 20- or 30-year fixed, eliminating the need to go through the refinancing process once construction is complete.

Considering an addition or major remodeling in place of a new build? Remodeling construction loans and renovation construction mortgages are available for projects that exceed a certain dollar amount.

Remember that not all lenders handle construction financing. When considering the best lender for your needs, be sure to look for one with local experience in construction financing, who has a good reputation among area builders and customers alike, and who can offer more than one or two construction loan programs.

New to the home construction process? Download the free whitepaper, “Construction Loans: What You Should Know” for a general overview the homebuilding process.

Comments: If you’ve built before, what type of mortgage product did you choose? How did it work out for you?