Most people cannot afford to design and build their own home or pay out of pocket for major upgrades, which is why many lenders offer construction ready – shorter-term loans used to finance the construction or rehabilitation of housing. Here is Bankrate’s guide to the best construction loan lenders in 2021.
Methodology
To determine the best construction loan lenders, Bankrate assessed lenders against several criteria, including affordability (annual percentage rate and fees); timeliness (approval and closing times); and experience (including customer service).
The best construction loan lenders
GO Mortgage
Specializing in construction loans, GO Mortgage is a full-service mortgage lender headquartered in Brookfield, Wisconsin, offering some of the lowest down payment requirements for this type of loan. GO Mortgage issues loans under government-backed programs, including Fannie Mae, FHA, VA, and USDA conventional loans, so that minimum credit score and down payments (if any) and maximum down payments loans are determined by program. Notably, the minimum credit score for the GO single-fence construction loan is 640, and you don’t have to pay interest during construction if you use an FHA, VA, or USDA loan.
GO Mortgage also has a dedicated construction team that provides you with regular updates and oversees the construction phase, from draft inspections to state-required surveys. With this process, it usually takes about a year to complete construction and move in.
There is at least one downside to this lender, however, and that is the availability: GO Mortgage only works in 35 states and Washington DC.
LowRates.com
LowRates.com, operated by Sun West Mortgage Company, offers a variety of mortgages, including construction and home improvement loans, in 48 states (except Georgia and Massachusetts) and Puerto Rico. More specifically, the lender offers FHA 203 (k) loans as a refinance or for a purchase: You can borrow against the equity in your home for home improvements or you can get a one-time mortgage to finance both the purchase of a home and the cost of its renovation.
To qualify for a 203 (k) loan, you must prove that the funds will be for construction or renovations, have a credit score of 580 or higher, and provide your lender with a list of proposed improvements.
One notable benefit: The LowRates.com team has a 24-hour loan center that can answer questions related to home improvement and construction loans. However, anyone interested in exploring these options should contact the lender to find out more, as little information is readily available online.
Flagstar Bank
Flagstar Bank is a bank and lender and one of the largest financial institutions in the United States.
One option, a construction loan, can be used to build primary residences up to $ 3 million and second homes up to $ 2.5 million. The bank also offers loans with a single fence (construction for an indefinite period) or with a double fence (construction only). ready.
However, like most construction lenders, you will likely have a higher interest rate with Flagstar for the construction loan itself (in other words, before it turns into a permanent loan. ). According to the bank, during construction, interest is 0.75% higher than the permanent rate.
Construction loan vs renovation loan
A construction loan is a short-term loan to help buy land and build a house or pay for major renovations to an existing house. In general, these types of loans can be more difficult to obtain and often have higher interest rates.
A builder or borrower usually takes out a construction loan to cover the costs. cost of building the house before getting a standard mortgage. The lender pays the builder in installments following each phase of construction. Prior to project completion, borrowers typically only pay interest and repay the loan after construction is complete.
Renovation loans, on the other hand, allow homeowners to access funds for pay for home renovations. This financing can take various forms, such as a personal loan or a government insured loan, or taking equity in your home. Overall, home improvement loans are not as structured as construction loans, and borrowers have more options for accessing funds.
Construction loan requirements
Construction loan lenders have varying requirements, but they are usually based on the amount you are borrowing. As with other types of mortgages, your lender determines your eligibility for a construction loan by assessing your creditworthiness, income, debt-to-income ratio (DTI), and other factors:
- Credit score – Most lenders require a credit score of 680 or higher, but some may work with borrowers with lower credit scores.
- DTI ratio – Lenders generally seek that your debts amount to no more than 45% of your monthly income.
- Advance payment – A down payment of between 20% and 30% is usually required, although some government loan programs may require less.
- Construction plan – Lenders generally require a detailed plan before financing the first phase of the project.
- Repayment plan – In addition to the construction loan itself, you must also be eligible for permanent mortgage financing. The construction loan covers project payments during the construction process and then turns into a permanent mortgage on completion.
Generally speaking, mortgage lenders tend to have more stringent restrictions on construction loans because the asset (the house) does not yet exist.
How to choose the best construction credit lender
Construction loans can be complex, which is why it is best to work with a lender who has experience with this type of mortgage. Procedures and policies differ from lender to lender, so look for one that can fit your schedule and needs.
To find the best mortgage lender and get the cheapest loan, compare several construction loan lenders and their rates and terms, and also compare your interactions with them. If you are looking for responsiveness, for example, note it in your discussions with the loan officer. Ultimately, the best lender for you depends on your unique goals, preferences, and financial situation.
How to apply for a construction loan
To apply for a construction loan, you will need to provide the lender with your employment history and financial information, including your income, assets, and debts, as well as your contract with the architect or builder and their plans for the project. These plans should specify the estimated total cost of construction so that the loan amount can be credibly established. Once your application is submitted, be prepared to answer any questions your lender may have and provide any additional documentation as needed. This will help speed up the underwriting and approval process and keep things on track.
