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.
What do I Need to Qualify?
As with traditional mortgages, minimum credit scores, maximum debt-to-income ratios and down payment requirements vary from lender to lender and are usually based on the amount of money borrowed.
Fintech Mortgage Association will review your:
- 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