What Is A Construction Loan?
Buying your dream house requires a mortgage, but building your dream house? Well, that requires a mortgage with a twist.
Construction loans are shorter term, higher interest rate loans that cover the cost of building or rehabilitating a house. The lender pays a construction loan to the contractor — not the borrower — in installments as building milestones are achieved. Once building is complete, home construction loans are either converted to permanent mortgages or paid in full.
- Debt-to-income ratio: Lenders generally expect your debts to total no more than 45% of your income, and lower is better.
- Credit score: Most construction loan lenders require a credit score of 680 or higher.
- Down payment: A 20% to 30% down payment is typically required for new construction, but some renovation loan programs may allow less.
- Repayment plan: With a construction-only loan, the lender might want to know if you’ll pay the balance in cash or refinance when building is complete
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