The Ultimate DIY: Construction Loans

Building your own home is the ultimate DIY if you have the skills, experience and connections to be able to pull it off. Buying your dream home requires getting a mortgage, but building your dream home from the ground up? Well, that requires a mortgage — with a twist.

Construction loans are shorter term loans that cover the cost of construction or remodeling a home. They are typically short term with a max of one year and have rates that adjust with the prime rate.

A mortgage is typically between a borrower and lender, but construction loans add a third party to the mix with a builder. The lender needs to see a detailed plan and timetable as well as a realistic budget for the project at hand. This is sometimes called the “story” of the loan and is necessary to provide the outline for a lender to consider the risks involved with this specific type of loan. If a borrower is building the home themselves, this helps them prove that they have the experience and skill set to complete the project.

There are three types of construction loans:

One-Time Close
This is one single loan that converts to permanent financing once the construction is complete. These loans are great because the interest rate is locked in for the duration and cannot change if rates go up during the construction period. This type of loan will save you thousands in closing costs as you only pay closing costs once.

Two Time Close
The first loan pays for construction of the home as it takes place and once construction is complete, the second long term financing loan pays off the initial construction loan. The benefits of this type of loan are a lower overall down payment as well as a lower initial rate, however, the interest rate does not get locked in and can increase.

Renovation Construction Loan
This is a construction loan for remodeling or renovating existing homes. This is a one-time close loan that can be done as an FHA or Conventional loan but may also be used on purchases or refinances. You could use this loan if you buy a home with an unfinished basement or want to create an addition off the master bedroom.

We recently helped a client with five children who were anxiously seeking the perfect home in 9th & 9th district of Salt Lake. They could not find a home in this neighborhood with enough bedrooms to fit their needs. We were able to find them a very large 2 bedroom outdated home in 9th & 9th. It did not have the number of bedrooms they needed but it had good bones. The client bought the home for $310,000 and included about $100,000 in Renovation financing. The final appraisal after the remodel came back at $450,000, which means he gained $40,000 in equity!
Whether you are a first-time homebuilder, or just want to make the current home you live in feel like new, we have a solution that is sure to fit your needs. There is no such thing as a “one size fits all” approach when it comes to mortgages, and you don’t have to DIY. We have the foundation of knowledge to help you build your dream home one brick at a time!