Constructing a house is a massive financial ordeal. There are several costs to take into account and several unanticipated events that need to be dealt with tactfully. Once individuals have an estimate of the project’s total cost, they should look for the best home construction loans they can find on the market. A home construction loan aids borrowers in building their dream homes without burning a hole in their bank accounts.
What are the types of Home Construction Loans?
Home construction loans are of the following 2 types:
One-time Closure Loan
A one-time closure loan covers all construction expenses in one single loan where the property under construction acts as collateral. Hence, it is also known as a construction-to-permanent loan.
Two-time Closure Loan
A two-time closure loan is when a single loan approval involves sanctioning 2 separate loans. During the construction phase, borrowers get a higher interest rate levied on a short-term loan. Upon completion of the construction, it gets repurposed into a lower interest rate imposed long-term loan, where the property acts as collateral.
What are some aspects to consider while taking a Home Construction Loan?
Borrowers should consider these 3 vital points while applying for a home construction loan:
The plot of land determines the loan process
Lenders conduct thorough inspections of the land on which a property is to be built. They go through applicable municipal approvals, land records, permissions, etc. before approving the loan. Typically, lenders offer an LTV ratio of 75-90% for housing construction loans.
Construction must commence for loan disbursement
In most cases, lenders credit home loans only after the construction of the property has begun. Therefore, it often happens that borrowers need to build the foundation of their property before lenders disburse the loan quantum. Meaning, in its initial stages, borrowers themselves fund their property’s construction.
Loan disbursement may halt for certain reasons
Lenders often visit project sites to monitor the construction through all of its stages. They can choose to stop further loan disbursement if the following happens:
- Indefinitely delayed construction.
- Major alterations to original construction plans.
- Halted construction itself.
How to ensure a successful approval of a home construction loan?
These are the 5 pieces of advice that individuals should follow to get quick approval for their housing loan:
Maintain a healthy credit score
Since credit scores reflect borrowers’ trustworthiness and reliability, it is always recommendable to keep credit scores above 700. Higher credit scores directly translate to better possibilities of getting loan approvals at lower interest rates and vice versa.
Hire renowned contractors
Individuals should hire well-reputed contractors to undertake their house’s construction. This allows lenders to have more confidence in the quality of construction, and thus, leads to faster loan approvals.
Keep necessary resources handy
Borrowers must keep the required paperwork and capital for their property’s construction handy. They need to provide lenders with details like the contractor’s contact information, the property’s size, and a list of construction materials.
Check eligibility criteria
One should always avail of a home loan based on the set housing loan eligibility criteria as all lenders judge borrowers’ loan eligibility before approving a loan. Lenders assess the repayment capability and income of loan applicants to decide whether they are eligible or not. Ideally, payable EMIs should be lower than 50% of one’s monthly income.
Take additional expenses into account
Building a house is a grand ordeal, thus, it often entails unforeseen expenses that, if not planned ahead of time, can throw a wrench in the whole construction process. Ergo, individuals must assure lenders that they have enough capital to support the construction process if things go awry.
Many lending institutions extend pre-approved offers on home loans, loans against property, and other sorts of loans. This simplifies the lending procedure and in turn, saves time. Individuals may check their pre-approved offers by providing the required data.
Individuals building a house should wisely choose from the best-suited home construction loans to avoid draining all their savings while building the house. This way, borrowers get to relieve themselves of financial burden by paying off the debt gradually over decades.