Home Construction Loans

A loan for building a house is basically a secured loan that is granted to the borrower for construction expenses. These loans are quite hard to come by and there are cases where the loans are underwritten and in some cases denied due to the risks involved in such a loan. It is rare to find home loans with bad credit due to the significant amount and risk that is involved in the mechanism of the loan. In the following article, the mechanism of the loan has been discussed and some common practices of the lenders have also been included.

What are Home Construction Loans?

These secured loans and are often tied down to the equity of the real estate that is being developed and are given to people who want to build their own homes. The total amount of the loan depends upon the estimated cost of construction. A differential feature of this loan is that it requires a down payment. It means, that the borrower is expected to bear a certain cost of the entire loan. The mechanism of this loan is a bit different from the normal home loans or mortgage loans. This real estate loan is secured with the help of home equity.

How do They Work

When it comes to home loans, the lenders are anxious about recovering their money on time, hence the security and hence the lengthy approval procedure. In order to get the home construction loan, you will have to fulfill some construction loan requirements. The common requisites are as follows.

• As an applying borrower, you need to be employed or have a very secure and steady source of income. This loan being an installment loan has to be repaid within a given period of time. This time period starts as soon as the construction process is completed. The installments are usually repaid on a monthly basis. These installments go on till the amount gets repaid. The long repayment process means a low interest loan, but a prolonged liability. The big issue for every lender is thus the borrower's income.
• The second requisite is that the place of construction should not be a collateral to any debt.
• The last requisite is that the borrower must have a reasonable credit history and an average and above average credit score. Overall, a lender will demand a positive credit report.

Often borrowing this loan is referred to as underwriting the loan. The total amount that is given to the borrower is about 85% of the required construction cost. This 85% in some cases is also issued in 'draws'. A draw is basically like an installment that is paid by the lender to the borrower. Draws are issued on weekly and monthly basis. Such amounts in some cases are also issued on the basis of the expenditure that is incurred from contractors and material purchase. While applying for such a loan, you will have to present such a home construction checklist that will help you and the lender to estimate the 'draws'.

After the construction is finished, the construed property has a 'home equity', i.e.: the constructed building or the newly constructed part of the building has a market, which is referred to as the home equity and is expressed in monetary denominations such as 'home equity worth $400,000. This equity is used as a collateral for the loan. Though the loan is a secured loan, there not much a choice of liquidating the security. Hence, the lender will be always on his toes for timely repayment. Overall, if planned very carefully, construction loans can be used and repaid very successfully.