4 Things You Should Know About Construction Loans

If you want to improve your existing property, renovate a house that’s in need of updating, or build a home from scratch, getting a loan might be necessary.

Lenders have specific packages for this purpose, sensibly known as construction loans. And while you might assume that they function in a similar way to a mortgage, there are actually some key differences to keep in mind, and some caveats to be aware of before you commit.

Here are a few of the main talking points before you dive in.

Different lenders will offer different rates and terms

It goes without saying that there are a large number of lenders operating in this space, so it pays to compare the packages they have to offer and look closely at the terms that apply to each.

Terms can vary significantly depending on the type of loan itself, as well as whether it is being provided by a traditional bank, or a hard money lender. In the latter case, comparing hard money home loans with HardMoneyHome.com is certainly the best way to find competitive rates and amenable terms.

The most important things to be aware of are the repayment schedule and the interest that will be levied against your construction loan. These can massively impact the affordability of a loan, so don’t neglect to check these carefully and factor them into your budget.

Some lenders will want to know what you intend to spend the money on

This is another major variable when working out which construction loan is right for you. In some cases, you won’t need to justify the loan to the lender by letting them know how you are going to use the cash. In others, this will be unavoidable.

If your project is relatively small in scale and will cost under $20,000 or so to complete, then lenders will not necessarily need an in-depth breakdown of where your budget will be spent.

For larger, expensive renovations or full house builds, lenders could not only scrutinize your budget, but might even assess any contractors you are intending to use to ensure they are reputable.

That said, whatever the size of the loan or the requirements of the lender, it obviously helps to have a plan in place for your project before you apply for funding. The more confident a lender is in what you are proposing, the more likely they will be to grant approval.

Calculating the value that the work will add is helpful

Another way to sell yourself to a prospective lender when you seek a construction loan is to look at the value which will be added to your property by completing the work. Or in the case of a new build, provide the estimated value of the home that is being created.

If the value which the work adds is significantly more than its cost, then obviously this is a good investment. And if you are using the property as collateral, then this will also be in the lender’s interest to know about.

Insurance is essential

Even if you think that a project will go by without a hitch, you need to get adequate insurance to cover the value of your home and also to protect it from the kinds of catastrophes that could arise.

From fires and floods to criminal damage and beyond, insurance will protect both your property and the investment you have made in it, as well as reassuring lenders that you are being responsible in this potentially precarious situation.

In essence, careful research, planning and evaluation of your own finances will help you find and secure construction loans, and insurance will give you a backup plan.

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