Achieving the goal of moving into your dream house may require a mortgage but financing the construction may require something different than a standard mortgage used to complete the purchase of an existing house. A construction mortgage loan pays for the building or renovation of a house. However, such a mortgage loan will require a different approval process than a traditional mortgage loan used to purchase a move-in ready house. If you’re hoping to build a new (custom) house or conduct major renovations into an existing house, construction loans might be the option for you.
What is a Construction Mortgage Loan?
Construction mortgage loans are made to finance the construction and renovation of a home. This type of mortgage loan usually carries lower interest rates than mortgages and is usually for shorter terms, with the entire loan paid off upon completion of the project. Lenders usually require a construction loan to define how the money will be used.A construction loan is the type of mortgage loan wherein you’re essentially getting cash to pay for the construction as progress is completed on the various phases of the construction process.
Types of Construction Loan
There are a few different types of construction loans, and the one that is right for you will depend on your financial situation and your goals.
This type of loan is the most common and is the one used in most home renovation projects. T After the work is done, the loan is then repaid over a term of a few years.
What is a “TRUE” Construction Mortgage Loan
A “TRUE” Construction Mortgage loan is used to pay all costs of construction during the construction process to make the house a move-in ready property. This can include everything from the purchase of the vacant land and or demolishing an existing structure to landscaping and light fixtures. This type of loan usually requires a contract with a licensed builder, a complete line-item costs to complete data (value) and a plans & specs appraisal of the finished product as proposed. The lender will establish the loan amount in relation to the lower of appraised and cost to complete value (LTV) based on credit and other underwriting criteria. This type of construction mortgage loan generally requires interest only payments based on the amount of money you have drawn to pay for the previous month(s) progress payments made to the various providers of goods and services while building the house. Once the house is completed as agreed and you have a certificate of occupancy, you now are required to pay back the money you borrowed to complete the construction of your dream house. This can be accomplished in one of two ways. You will be required to commit to one or the other prior signing for the construction mortgage loan way at the beginning of the process.
The first way is a Construction to Permanent Mortgage Loan. When the construction is completed your construction loan balance is simply rolled over into a standard 30 year fixed loan, just as if you purchased a completed (existing) house.The second way is to get an “END” loan. This is a mortgage loan that is used to pay off the construction mortgage loan balance. This is really nothing more than a refinance mortgage loan. Which has many advantages and disadvantages. Contact one of our construction mortgage loan officers to discuss the option that best meets your goals.
If you’re looking to significantly renovate your home, a construction loan might be just the ticket. You can use it to finance the construction of new additions, or you can use it to construct a custom home from scratch.
MMS Mortgage Services, Ltd. is here to help you finance the house of your dreams. As a Licensed Mortgage Lender in Michigan and beyond, we can walk you through the mortgage process from start to finish. Whenever you need refinancing or construction loans in Michigan, MMS Mortgage Services, Ltd. is the one to call. Please call (248) 788-0800 or toll free at (800) 945-4506 then press 2, to schedule your free consultation.