Construction And Renovation Loans Explained

Constructing or renovating your dream home can be exciting but can also get overwhelming. With so many variables, extensive plans, and lots of money involved, you might have a tough time knowing where to start. Before breaking ground, you’ll need to understand construction and renovation loans.

What Is a Construction Loan?

Consider getting a construction loan if you want to build a new home and need money to finance the project. Construction loans cover any costs related to home construction – things like purchasing building supplies, equipment, permits, a work crew, and sometimes landscaping.

Getting a home construction loan is different from getting a mortgage. Construction loans are specialty financing that covers a specific, time-sensitive project. A construction-to-permanent loan covers construction costs and then converts to cover the mortgage.

Construction loans can be tricky if you don’t have experience with them. Here’s a snapshot of some things you should know:

  • Construction loans require a high down payment (typically no less than 20%) and a good credit score (usually no less than 620).
  • Interest rates are usually higher than personal loans.
  • You won’t have any excess funds to use for home furnishings.
  • Construction loans don’t cover the design process.

Types of Construction Loans

You have a few available loan options to help you build your new home. Construction loans cover the entire project and every step along the way. Two common types of construction loans include construction-only loans and owner-builder loans.

Construction-Only Loan

A construction-only loan is a  short-term loan, typically one year. It only covers the construction phase of your project, such as laying the foundation and attaching the roof. Every construction project has multiple variables (e.g., securing permits and builder cooperation), making this a higher-risk loan with equally high qualification standards.

Owner-Builder Loan

Most prospective homeowners hire a contractor to oversee and manage the entire building project. A general contractor coordinates everyone and ensures the work gets done according to the budget and schedule. However, not every soon-to-be new homeowner wants to pay for a contractor.

Consider getting an owner-builder loan if you want to manage the construction project yourself. This type of loan offers the necessary funds to be your own general contractor. However, you usually have to prove your education and expertise to qualify.

What Is a Renovation Loan?

Have you already built your home but need to renovate it? Are you looking to buy a new property that will require significant remodeling? A renovation loan is your number one option.

Renovation loans cover in-home projects such as renovation, remodeling, and repair. They help you pay for the necessary materials, equipment, workforce, etc. Like construction loans, there are multiple types of renovation loans:

  • Federal Housing Administration (FHA) 203(k): FHA loans cover renovations in a primary residence with at least a 3.5% down payment. Standard FHA loans have no maximum and start at $5,000. On the other hand, Streamline FHA loans provide renovation funds for up to $35,000.
  • Fannie Mae (FNMA) Homestyle: FNMA loans allow you to buy and fix a primary, secondary, or investment residence with a down payment of at least 3%.

Should You Get a Construction Loan or a Renovation Loan?

Now that you know some details about construction and renovation loans, you might wonder, “Which one is right for me?” Choosing the right type of loan for your home depends on your unique circumstances.

Consider these factors to decide if a construction loan is right for you:

  • Unique needs and preferences for building a new home
  • Constructing a home versus buying one
  • Timeline for each phase of the project
  • Available budget
  • Loan qualifications

If you’re looking to get a renovation loan, ask yourself these questions:

  • Are significant renovations and remodeling necessary?
  • Is now the best time to start this project?
  • Can you afford such a potentially extensive task?
  • Do you qualify for a renovation loan?

Thinking through these points will help you determine which loan is right for you—or if you even need one.

Turn Your Dream into a Reality

Are you building your new home or planning to purchase and renovate a new residence? Cape Coral Mortgage provides many mortgage solutions to match your specific needs. To discuss your financial situation with a professional and start turning your dream into a reality, call us today at (239) 540-5555!

About US

Cape Coral Mortgage has been in Florida for 20 years with over 100 years of combined experience in the mortgage industry. Our team has vast experience in all phases of mortgage lending.

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