There are a lot of advantages to building your own home versus purchasing an existing home. But the biggest hurdle to building a home is probably the process of getting qualified for a construction loan in California. The good news is that there are different types of loans available for you to choose from. The bad news is that you have to meet rather strict requirements to qualify. Fortunately, there are a few things you can do to make it easier to qualify for a loan. Construction Loan Options Most construction loans are short-term loans designed to finance the purchase of land (or paying off existing land loans) and the building of your home. Generally, you're expected to apply and qualify for a mortgage after your home construction is finished, which is why construction loans seldom exceed a term of 12 months. Construction loans also differentiate between owner-occupied and non-owner-occupied homes. For example, if you're building a home to live in, it may be easier to qualify for the loan than if you are building a rental property of any kind. Finally, it's possible to get a loan just for the land. This is helpful for people who found a property they like but haven't finalized their building plans yet. Later on, a construction loan can help you pay off your land loan and build your home at the same time. Construction Loan Requirements Construction loans are harder to get than conventional home loans because the bank is gambling on quite a few things. For one, it's difficult to appraise the value of a home that hasn't been built yet. Two, your builder may exceed their budget. Finally, you still have to qualify for a regular mortgage at the end of the construction period unless you can afford to pay off the entire loan at once (which is rarely the case). In order to minimize the risk for the lender, borrowers often have to meet these requirements: - Excellent credit rating
- Sufficient, stable income
- Significant down payment (20% and up)
- Use of a general contractor
Even though it might save money in the long run, your bank probably won't approve you to act as a general contractor for building your own home. The exception would be someone who has experience working as a general contractor, but few aspiring homeowners fit that description. How to Get Qualified In order to get qualified for a construction loan, you should start working on it early. It can take some time to get qualified, especially if you still need to get your finances in order. One of the most important things is to have a stable, sufficient income source. Another thing you can do to get approved for your loan is to save up a significant down payment. This reduces the risk for the lender, and therefore makes them more likely to approve the loan. A higher down payment may also help you get a better interest rate. When it comes to construction loans, you can shop around in your area. Not every lender deals with construction loans and some lenders exclusively finance new constructions. There will probably be significant differences in each lender's terms, including the length of the term and the interest rate. While you're applying for a new construction loan in California, you should probably also find an experienced contractor to build your dream house for you. Your contractor might be able to make a recommendation for a lender. But at the very least, working with a contractor will give you a better idea of how much money you need to borrow.
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