Home Construction Loan – What Is It and How Do You Qualify For It?

Home Construction Loan – What Is It and How Do You Qualify For It?

If you are building your own home instead of purchasing one that is pre-constructed, you will need to get a home construction loan, instead of a traditional mortgage. A traditional mortgage requires you to put up your home as collateral. Since you don’t have a home to offer as collateral, given that you are building it from scratch, your best bet is a home construction loan. 

What Is A Home Construction Loan?

A home construction loan is a short-term loan that usually has a tenure of around a year. The loan will provide you with enough funds to construct your home. At the end of the loan tenure, you will essentially have to get a new loan and repay the home construction loan. The new loan will have a longer tenure and terms similar to that of a mortgage.

How To Qualify For A Home Construction Loan?

Banks and lenders may be slightly wary of home construction loans since the end value of the home is not something that can be assessed from the get-go. Further, the lender also doesn’t have collateral if you default on payments. As a result, home construction loans often have stricter requirements, such as:

You must have a qualified builder: Lenders are likely to only approve your loan if there is a licensed and qualified builder involved in the project.

Specifications of the property: The lender will require you to provide details and specifications of the property such as the floor plan, the materials that will be used, type of home insulation used, ceiling heights, etc. The builder will often put these details together in what’s called a “blue book”.

The value of the home should be appraised: The lender may also have an appraiser estimate the value of your home by checking the specifications, the value of the land, and the details mentioned in the blue book.

Larger down payment: Home construction loans require loan applicants to put down a large down payment, which usually ranges between 20% and 25% of the purchase price of the home. 

If you meet the lender’s eligibility requirements, you are likely to get approved for a home construction loan.