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Home Construction Loan
Home construction loans are becoming more popular in the United States. However, because of their complex nature, these loans are difficult for the average American to understand, and therefore many home buyers choose other methods of financing their repairs. But if you have a little further understanding of the home construction loan, you can get into a house that needs a little TLC, get it fixed up and have all the money in a single loan, easy to manage while keeping your out-of-pocket expenses to a minimum.
The Mechanics of a Home Construction Loan
Working with a lender to obtain a isn't much more difficult than a standard fully amortized home loan. The key things to understand are:
- The lender will not lend more than the home appraises for. So the total cost of your sales price and all work that will be financed by the lender must be less than or equal to the appraised value of the home.
- Typically the lender will have a maximum time line established for completing the repairs. So when you are shopping a construction contractor, make sure that they know what the time line is, and make sure they stick to it (contractors are notorious for not completing work on time, and the bank doesn't care, it is your problem).
- Also, you must have the ability to qualify for a loan that is higher than the purchase price. So if you are maxing your available credit with the bank just to purchase the property, than you will not be able to get the additional money for repairs.
Home Construction Loan Arrangements
Once you have gotten bids in from the contractors, qualified for the loan, and have all the goals set out in writing for all the work that needs to be done, the construction phase begins. Lenders operate on a “draw” basis, therefore at periodic times, you will receive a portion of the money to pay your contractor(s). Usually it is in the form of a reimbursement, thus you will have to pay the contractor first, then get the draw in from the bank to cover the payment. You can do this through any means negotiated with the contractor, but the lender usually wants to see an invoice, and evidence that it has been paid.
The draw terms vary from lender to lender, so check carefully before agreeing to a home construction loan. Sometimes, then lender only allows a single draw, after completion of all work, and inspection of the completed project. So for example, if a project takes 90 days and $20,000, that can be quite difficult for a home owner that doesn't have a lot of cash. They would have to find a way to finance the project for three months before getting reimbursed by the bank.
Summing Up the Home Construction Loan
A is fantastic for folks who don't have a lot cash to invest, but would like to buy a home that needs a little work. For the investor, this type of financing is also attractive to minimize the amount of initial cash into a particular investment property. The mechanics are a little tougher than a normal home purchase loan, but are well worth it.
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