Financing can get complicated if you plan to build your from-the-ground-up dream home, beach cottage, or woodsy cabin. Here are a few tips to help you navigate the process.
It is typical for lenders to ask for a down payment of no less than 20%. They also want a purchase agreement or deed on the land, blueprints, and a project budget that includes all line items.
For large, long-term new construction Wichita projects, bank loans are an option. It is vital to find a lender who specializes in construction loans and has experience with this type of financing. It is also a good idea to ask your local banks for recommendations, especially ones that serve your community well.
Lenders will require all typical mortgage application materials, including financial documents and a detailed project plan. They will also evaluate the builder you choose, scrutinizing their reputation through public information such as vendor and subcontractor reviews and online ratings.
The lender will usually require a significant cash down payment at closing to demonstrate that you are committed to the project and that it is a viable use of your money. Upon completion of the building loan, it will be converted to a permanent mortgage, for which you will be responsible for repaying the principal and interest.
Using credit cards as a financial tool can benefit construction companies. They offer flexibility in payment and cash flow management and are easy to use.
Contractors can use business credit cards to pay for materials, equipment, and payroll. However, they must be careful not to carry a balance and avoid paying interest.
Lenders will look at your personal and business credit history when applying for a conventional construction-to-permanent loan. A robust private credit score is vital to getting a low rate and better loan terms from a lender.
New small business credit cards always come out with different bells and whistles. But some have fine print that can sink a company in the long run. For example, some cards will raise your interest rate if you’re even one day late on a payment.
Lines of Credit
Contractor financing describes the financial options construction companies can use to improve cash flow. These options can provide advance funds or allow contractors to defer payment for expenses.
Generally, loans for construction have short terms, like one year, and are only offered during the actual building phase. These are called construction-to-permanent (CP) loans. They are also often more costly and have higher fees than traditional mortgages.
To qualify for a loan for construction, you need to have strong personal credit and detailed plans for your project. Lenders typically require a substantial down payment as well. It is to help assure the lender that you are invested in the project and will not simply disappear if it fails. Lenders may also want to see a contractor’s business plan and budget before providing you with funds.
Home Equity Loans
Home equity loans are unequivocally loans that must be secured by your home’s equity, akin to second mortgages. Borrowers with high credit scores and adequate home equity can get approved quickly.
Loans are often used to consolidate debt or make significant improvements, such as energy-efficient upgrades. In these cases, interest payments may be tax deductible.
Most lenders require high minimum down payments for home construction loans. It ensures that the borrower is invested in the project and won’t walk away if something goes wrong during construction. Lenders also scrutinize the borrower’s reputation and review financial documents. Depending on the lender, this might include vendor and subcontractor reviews, financial statements, personal credit, etc. Many significant lenders offering home construction loans are national banks, but smaller community banks and credit unions can also provide funding.
Home Equity Lines of Credit
A home equity line of credit is a revolving type of financing that works much like a credit card. Borrowers can draw funds in conjunction with each primary construction phase, only repaying interest as an inspector or appraiser assesses the build at critical intervals.
The lender typically requires a construction timeline, detailed plans, and a realistic budget to approve the loan. It also may require a prepaid homeowners insurance policy with the builder’s risk coverage.
It’s a good idea to shop around for a construction loan. Check with local banks, savings and loans, mortgage companies, and even credit unions specializing in home building and construction. Local lenders are the experts in the property market and provide unbeatable rates. Not only that, but they will quickly guide you through the loan process.