Construction Loan vs. Mortgage

You are currently viewing Construction Loan vs. Mortgage

Is a construction loan different than a mortgage? Yes, they are different.  Simply, a construction loan is short term. This is the kind of loan you take out to construct your home. Once the building is done, you are expected to pay the cost in full. Releasing of the money is also done in increments, as the building progresses, money is released. In a construction loan, you need to pre-qualify. This can be a tedious process because there is no collateral that can be used for your loan. Lenders will ask you a lot of requirements because they want to make sure that you can repay.  You will need to submit architectural plans, your financial documents to prove you can repay, your builder needs to prove that they can deliver as promised as well. Usually, a construction loan will require you a downpayment of between 20%-30% for new construction unless you take out an FHA loan which will require a lesser downpayment and can go as low as 3.5%.  Your credit score needs to be 680 or higher.  And lenders will check your debt-to-income ratio as well. The minimum requirement  varies from lender to lender but most of them require that your debt be 45%, or lower. It would be advisable to talk to a loan originator for updated minimum requirements as these are changing frequently because of the COVID-19 situation. A home mortgage, on the other hand,  is long term.  If you can’t pay for your construction loan (short term;while building) after your home is finished, you apply for a home mortgage  – this is also called a two-time close construction loans.  We can offer you a one-time close. No need to apply and comply with different requirements that can stress you out. A one-time close is advantageous for borrowers because, as a borrower, you only need to submit all the necessary requirements once.  Your interest rates are fixed from construction to permanent loan and you need not worry about the risk of higher interest rates for your second loan because lenders will give you a reduced closing cost. If you still need more information, don’t hesitate to contact us so that we can answer your questions and help you get on your way to getting your American dream home.