Everything You Need To Know About Residential Construction Loan

by James Smith SEO Consultant

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Construction loans are loans that fund the building of a residential home from the land purchase to the finished structure. Two common forms are the construction-to-permanent loan which becomes a mortgage when the construction is completed and the standalone construction loan which is a short-term loan that solely finances the building phase. When the main balance of a stand-alone construction loan is due, borrowers frequently get a second mortgage to cover the outstanding balance. Construction loans usually have higher financial requirements and interest rates than conventional mortgages for existing homes.

How do construction loans work?

A construction loan's first term often lasts a year or less during which you have to complete the project. Residential construction loan in Melbourne is subject to tight timelines and project progress, so you or your general contractor will need to give the lender a construction timeframe, comprehensive designs and a reasonable budget. Based on it, the lender will release the money to the contractor at different stages of the project, generally without intermediaries.

Construction loan rates

Construction loan rates are higher than those of conventional mortgages. This is largely because they are not secured by an asset. Your house serves as security for a standard mortgage; if you don't make your payments, the lender may take possession of it. Lenders typically see residential lending in Melbourne as a higher risk because they don't have that option.

Construction loan requirements

A low debt-to-income ratio and evidence of sufficient income to repay the loan are prerequisites for obtaining a residential construction loan in Melbourne. You typically require a credit score of at least 680. As with most mortgages, you must provide a down payment when you apply for the loan. The lender will not fund the project in its entirety. Although the exact amount will depend on the lender you select and the amount you're attempting to borrow for building costs, construction loans typically need a down payment of at least 20%.

Finding out how much you can borrow for the project may be usefully ascertained by being preapproved for a construction loan. This can be a crucial step in preventing the need to pay an architect for their designs or create blueprints for a house you cannot afford.

Author’s Bio: The author is the owner of this company which offers residential construction loans in Melbourne and many more articles have been published on this topic.