The housing market is always shifting. Some years, there are more buyers than sellers, leading many home buyers to consider building a new home instead. Sometimes it’s a matter of having a specific build in mine. Regardless of the reason, unlike buying an existing home where a mortgage is typically obtained to purchase a home, building one requires a home construction loan.
What is a Construction Loan?
A construction loan is a temporary financing solution designed to fund the building of a house. Typically, it covers the land that is purchased and the finished building. Other items it may cover include:
- The land
- Contractor labor
- Building materials
- Permits
Buying a Home vs. Building a Home
As we’ve already discussed, a construction loan is different from a traditional mortgage. What are some of the key differences? Well, here are a few:
- Funds Distribution: Unlike a traditional mortgage that is distributed in a lump sum, construction home loans are paid out as milestones are completed.
- Repayment: Traditional loans require that borrowers begin to repay their loans immediately. However, with a construction loan, repayment typically begins at the construction stage.
- Inspection: An appraiser will check the construction at various stages of a home rather than at the sale of a home.
- Requirements: There are not many differences for requirements to a construction loan vs. a traditional mortgage. Being financially stable, having good credit, and having a down payment are among the main qualifications for a construction loan.
How Much of a Down Payment to Build a House
It usually necessitates a minimum down payment of 20% of the overall project expenses, encompassing both the land purchase and construction costs. Once the construction phase concludes, these loans are converted into standard 30-year mortgages.
When is Down Payment Due for New Construction Home?
Depending on how you approach purchasing a lot or land for a new construction project will impact the down payment required and timeline to pay it back.
Typically, you will want to allocate 25% to 35% of your total budget towards the purchase of the land. The value of the lot will serve as collateral for the construction loan and can reduce your down payment for the construction loan.
Do I Have to Put a Down Payment To Build A House?
Yes - but it is not an additional loan. In order to build the house, the construction is also built into the loan. If you are able to utilize owned land as collateral, you may be able to avoid the cost of an additional construction loan. But remember, you need at least 20% of the total project cost.
Build a Home With Valor Mortgage
Building a home is no easy feat. With the right team, it can be worth the journey. As a licensed mortgage lender in the state of Tennessee and Kentucky, my team and I can help you apply for your construction loan. We would be happy to help you get connected with recommended builders in Tennessee as well!
