Financing a custom home build or a “stick-built house” in Michigan uses a construction loan. Commonly these funds help with the property purchase and the full project through to completion and then convert into the mortgage. The loan doesn’t offer provisions for a designer or architect.
Understanding Construction Loans
Construction loans are short-term products extending roughly a year, during which time custom home projects should be completed. A detailed plan complete with a timeline and a realistic budget must be prepared and presented to the lender since these financial solutions are based on progress over a short span.
The loan provider will assess the plan and release funds to the contract or intermittently as the project progresses, usually when significant milestones are achieved, such as a poured foundation or house framing.
Visit https://www.houzeo.com/blog/how-much-does-it-cost-to-build-a-house/ to learn how much it costs to build a house. Here are different types of construction loans borrowers can take advantage of based on their needs.
Construction-to-permanent
This loan transitions into a traditional house loan, which borrowers can term for up to 30 years at either a fixed or variable rate. While construction is ongoing, you pay interest only on money drawn; however, the standard principal/interest payments begin when it becomes a house loan.
Many construction loans are conventional; however, FHA loans are available with less stringent criteria, and VA loans for eligible veterans. The primary benefit of this product type is the one-time closing, saving costs.
Construction-only
The funds with this product construct a house, and repayment is made in full when the loan reaches maturity after roughly a year, either with a cash payment or by acquiring a house loan to pay the debt.
By taking this path, you can achieve savings since stand-alone loans are ultimately more than the permanent products because you have two separate loans.
This means not only an extra expense but additional effort in finding a quality and qualified mortgager to transition to.
A concern is qualifying for a house loan if your financial or credit circumstances worsened during the construction and not being able to take possession of the property.
Each lender has specific eligibility criteria that clients must meet to qualify for construction loans. Many of these criteria are the same for all financial providers. Here are some of those details.
- The financials: In order to qualify for a construction loan, lenders assess debt-to-income, creditworthiness, and financial status or proof of income. The loan provider wants to see that you can repay the debt. They’re looking for a good credit score of roughly 700, a DTI of approximately 35 percent.
- The downpayment: Lenders require a down payment for construction loans as you would with a house loan based on the borrowing amount; a standard down payment is approximately 20 percent.
- The plan: Construction lenders require a detailed plan that includes a timeline for the project and a realistic budget.
- The appraisal: Regardless of the loan type, the provider expects an appraisal to discern the accurate value. With a construction-to-permanent product, the home will ultimately act as collateral when the project is complete.
Obtaining approval for a construction loan to break ground for a custom-builthouse is a more complex process than acquiring a house loan. Follow these steps
The builder
Lenders want assurance that the builder is a quality and qualified expert capable of finishing the project within the designated timeline. You can find a reputable Ingham County CustomHome Builder by searching the “NAHBs directory of local home builders’ associations” for the state.
In the same way, you would shop for existing homes before committing to a purchase, it’s important to compare multiple builders to find the most competitive rate combined with quality and expertise.
The lender
Varied providers offer construction loan products. Check with multiple for details on their programs and procedures, comparing the down payment requirement,rates, and terms and conditions to get the best deal for your needs and purposes.If you have difficulty getting approved, check smaller local institutions.
The documentation
A construction loan provider will request a builder contract with a detailed project plan that includes the anticipated budget. Builder references will be needed, as isproof of their credentials.
You will need to provide financials, credit details, debt status, and employment and banking information, comparable documentation as necessary for a mortgage.
The recommendation is to get preapproved to determine how much you will beable to borrow to know if you can hire an architect and interior designer in addition to the builder. Click for money-saving tips when building a custom home.
Final Thought
If you can’t find an existing house that satisfies your current needs in Ingham County, Michigan, a custom home build could be a better choice; create the house you want to live in.