Home loans span over several different categories, all of them focusing on your house. You can use your house for a home equity loan or a construction loan, a second mortgage or a reassurance for various other loans. But the one loan that will benefit you the most and is very helpful for new homeowners happens to be a construction loan.
What is a Construction Loan?
A construction loan, also known as a self-build loan, happens to be a short term loan used to finance the construction of a person’s home or other real estate projects or properties. A construction loan covers the costs of your project and the entirety of the building process before you access or obtain long term funds for the project. They can be taken out to finance rehabilitation and restoration projects as well as normal building projects. But due to the mass public considering this loan risky the interest rate happens to be higher than other home-based loans.
Construction loans aren’t taken out by banks or the mass population of lenders and are usually given by builders or a potential buyer seeking to build his or her own home. Unlike most loans construction loans happen to be short term loans and usually span over a few months to a year. After their home or building is built the borrower has two options to continue. They can either refinance their construction loan and turn it into a permanent mortgage or get a new loan to pay off their construction loan. The new loan is usually known as an end loan.
While the borrower is usually required to make the interest payments for their construction loan whist the project is going on some lenders tend to be stricter and require the entire loan to be paid off by the completion of the project’s construction.
Sometimes if the construction loan is taken by a borrower who wishes to construct their home then the lender tends to pay the contractor directly rather than paying the borrower. This tends to ensure that the borrower will not use the money for other causes.
How to get a Construction Loan.
Before obtaining a construction loan in Toronto it is crucial to consider all the aspects. Lenders tend to ask for a down payment of twenty to twenty-five per cent. If you have a history of limited credit and cash flow then the lender might purposely request a higher down payment. There is also a risk of a shortage of collateral due to the house not being built yet which poses a challenge in terms of seeking approval from a lender.
The first step to gaining approval is to provide the lender with a comprehensive and detailed list of the construction details, sometimes known as a blue book. Proving that a qualified and reliable builder and contractor are involved also happens to be another factor. The lender will be focused on ensuring their money isn’t spent in vain, which is why it is very important to have the lender approve of your choice in workers and the construction procedure in general.
If a borrower attempts to be their own general contractor or builder then it will be very difficult to gain a lender who will settle on their terms. Having to pay the borrower the amount and have them responsible for all of the payments and construction makes lenders sceptical which is why it is important to have a renowned yet reliable builder and contractor.
More so it is also important to have a reliable lender. After all, construction loans are tricky, especially the interest rates. Most lenders will look out for their profit rather than their borrower’s situation, thus your choice in the lender is very important. One such reliable and renowned company happens to be Freedom Capital.