ABC’s of Construction Loans
Building a home might sound like something reserved for the rich and famous, but the truth is, it might be easier than you think to get a construction loan.
What is a construction loan?
Construction loans are short-term, higher-interest-rate mortgages that cover the cost of building or renovating a home. The buyer qualifies for the final mortgage and the lender pays the contractor for cost on a pre-approved schedule. Once the construction is complete, the loan is converted into a traditional home loan.
Type of Construction Loans
Construction to Permanent – Converts to a permanent loan with the interest rate locked in at closing.
Construction Only – Must be paid off when construction is complete, so the borrower will then need to get new financing.
Renovation Construction Loan – Cost of renovations are included in the original mortgage based on the value of the home after the repairs or upgrades. Best used for buying a fixer-upper property.
What’s included in the loan? The construction loan generally pays for:
Labor and materials
Plans, permits, and fees
Contingency reserves to allow for changes and delays
Can I qualify? All mortgages have minimum qualifications for approval. Construction loans are riskier for the lender because there is no existing collateral in the form of the home. Along with typical requirements for debt-to-income limits and FICO score minimums, the lender will often ask for a higher down payment (30% is typical) and a plan to pay off the loan at the end of the project (proof of cash or loan).
Things to Consider before Buying a Home Together
It used to be that couples first got married, and then bought a home together. No more! Modern couples no longer consider marriage a prerequisite for buying a home together. Buying a property together can complicate either a breakup or a divorce if not considered upfront.
No one likes to think about the end of a relationship, but buying a home is a huge investment – not only in the relationship but financially. The partners may have differences in income, down payment, and contributions to the home. In the event of a separation, how will these issues be addressed? In other words, what happens if you break up?
The easiest way to ensure that everyone is protected is the title. Most married couples opt for Joint Tenancy that provides each homeowner an equal interest in the value of the property. The assumption is that marriage involves a merging of income and assets.
For couples who plan to keep their finances separate, a better option could be a Tenancy in Common. This form of title provides each owner with a separate, transferrable interest in the property. The interest does not need to be equal to the other; this could give one a larger interest if they contribute more financially. The interest can also be sold or inherited separately.
Don’t let the excitement of a home purchase keep you from considering the future. Before closing on that dream home together, consider the exit strategy – just in case.
Can You Sell An Outdated House?
It seems that everywhere you turn there are companies who advertise buying ugly houses. These messages offer to quickly buy any house, regardless of the condition. The problem is that their offers are often significantly below market value.
If you’re a seller whose home needs some attention, you might think these companies are your only option. Some of the offers sound attractive; quick sale, all cash, no commissions, and no fees. But before you do anything, it’s worth your time to call a local real estate agent for a second opinion.
3 Reasons to Call a Real Estate Agent Now
1. Free Advice–The real estate agent will not charge you anything to simply come look at your home.
2. Your House Might Not Be that Ugly–You may be surprised to find that your home is quite marketable. A few years ago, a 1950s mid-century modern home would have been considered a tear-down. Now, these ranch homes command top dollar and are in very short supply.
3. A Path Forward–If your home does have some issues, the agent can offer some ideas about moving forward. They can suggest local contractors to provide repair/upgrade services or market to investors that might still offer significantly higher prices than the quick-sale guys.
Even outdated houses sell. We are in a seller’s market in almost every part of the country. Selling your home has a large financial impact on you and your family. Don’t make assumptions about value, reach out to a real estate agent, and make sure you understand all your options so you can get the best offer possible.
Selling The Family Home?
Family is important, and your decision to sell your home may be difficult for those closest to you. Moving can create mixed emotions, and it’s important to help your family understand how and why you made your decision. Including family members in the process can prevent strong emotions from potentially sabotaging the sale.
As soon as you decide to sell your home, set aside time to have a serious conversation with the rest of your family. If you have children living at home, they may be fearful of leaving their home, their school, and possibly their friends. Listen to them and reassure them of the safety of the family unit.
You can’t promise that nothing will change, but share the good things you expect to get from the move; a bigger home, a better job, advantages of the new area, etc. Help your children see that you’ve considered them from the very beginning and explain why it will be a good move for them as well.
Adult children might be difficult as well. Even though they have left the home, they may be less than enthusiastic for several reasons. They may question your decision to move into the new home or area, or they might simply be nostalgic and sad to see their childhood home sold.
A home is a special place and the decision to sell, especially if you’ve been in the home for a long time, affects not just you but your family. You can help bring them into the conversation by making time to listen and understand their concerns and then share your own. This way, while you might not all agree, no one will feel left out of the decision.
Special Benefits of the VA Loan
Our military veterans have given so much to this country. To make it easier for these special families to qualify for and purchase a home, Veteran Affairs has a unique loan offer reserved only for retired and active military.
The VA loan offers mortgage options unavailable to the general public.
- No Down Payment – While zero down loans disappeared in the real estate bubble of the last decade, VA loans allow our military to buy a house without the stress of trying to save the down payment.
- Easier to Qualify – Most loans require a credit score of 650 or higher. Qualifying for a VA loan only requires a FICO score of 620.
- No PMI – PMI (private mortgage insurance) is required for any loan where the loan-to-value falls below 80%.
- Limits on Fees – VA borrowers are protected by strict limits to fees and closing costs. Lenders financing a VA loan cannot charge more than 1% for loan costs whereas typical financing can run as high as 2.4–3%.
- Appraisal Assistance – At times homebuyers run into problems when the appraisal does come back high enough to purchase the home at the agreed-upon price. When this happens, the VA can help by diligently reviewing the report and comparable properties and then asking the lender to adjust the appraisal if it determines that the value is not accurate.The VA loan is a special loan program offered only to our active and retired military. These families have sacrificed so much for their country, the VA loan might be the only way these families can buy a home of their own.