At Wasatch Peaks Credit Union, we’re proud to offer a wide variety of loans to our clients. From mortgages and major business loans down to car loans and several others, we offer great rates and personalized services to help you find the perfect financial assistance.
One of the loan types often utilized by those looking to build a new home is called a construction loan. What goes into a construction loan, how do you qualify, and what are the steps in the process here? This two-part blog will dig into everything you need to know.
Basics and Types of Construction Loans
In many cases where you’re building a new home from the ground up, you will not be able to get a standard mortgage. This is because the collateral used in a mortgage, the home, is not built yet.
This is where a construction loan comes in. It’s used to cover the cost of building a new home, or can sometimes be used for major renovations to an existing home. It usually lasts for one year, and then must either be paid off or converted into a standard mortgage once there’s a standing house to use as collateral.
There are two common types of construction loans typically offered:
- Construction-to-permanent loans: Abbreviated C2P, these loans may also be called one-step or single-close loans. They automatically convert into a standard mortgage once the construction of the home is finished, meaning the borrower does not need to go through another loan application process. Payments might be a bit higher on these loans, mainly because you only usually pay interest during construction. Once the loan is converted into a mortgage, the payments are often recast based on the remaining loan term. These loans are extremely convenient and require less paperwork, plus ensure you will not have to search for a good lender when the home is ready.
- Standalone construction loans: These are short-term loans to fund construction, coming without the automatic conversion into a mortgage once construction is finished. You will be responsible for either paying off the full amount or taking out a mortgage to cover it once construction is finished. This allows you to shop for the best recent rates, though you will have to pay two sets of closing costs and this method tends to be far less convenient.
Here are the basic requirements for qualifying for a construction loan:
- Documentation: Similar to a traditional mortgage, your lender will require various pieces of information on your income, tax statements, credit history, debts and liabilities and various other areas.
- Down payment: Down payment requirements vary between lenders. The general rule of thumb here is the more expensive the home, the higher the percentage often required.
- Builder requirements: Construction loan builders must be approved and will have to supply the lender with references who can attest to their history. This is to ensure lenders don’t risk homes being partially built and then left unfinished.
For more on construction loans, or to learn about any of our other loan programs, speak to the staff at Wasatch Peaks Credit Union today.