Benefits of Arizona construction loans and how to understand them.
Home development is a pretty complex process. Taking out a loan can be a very complicated part of the process. What exactly is a construction loan? In essence a construction loan is short-term, interim loan for the construction of a house. The terms of a construction loan are usually a maximum repayment period of one year; and the rates on these loans are higher than traditional mortgage loans. They also have variable rates. A variable rate means the monthly payment will slide up and down with the prime lending rate.
There are two types of Arizona construction loans. The first is a construction-only loan. In this scenario the borrower takes out two separate loans. The first is exclusively for the construction of the loan. After you move into the completed home, you will take out a mortgage loan. A construction-only loan will not require a large down payment. If the borrower has limited cash flow, but knows their financial situation will improve after the sale of the home, this is a good choice.
The second type of construction loan is a construction-to-permanent loan. With this type of construction loan you borrow the funds for the construction of the home. Then, once the construction is complete, that loan is turned into a traditional permanent mortgage. When the borrower is approved they will follow a schedule of the construction of the home. During the construction of the home the borrower will typically make interest-only payments.
How to qualify for a Arizona construction loan
Gaining approval for a construction loan can be more difficult that qualifying for a traditional mortgage. When you have a traditional montage your home acts as an asset. In case of default, the bank can take your home for collateral. With a construction loan, the bank has nothing to seize because nothing has been built. So, what will you need to qualify for this type of loan? You will need to be prepared for a down payment up to 20%, a history of stable employment (income), have a low debt-to-income ration and impeccable credit. You will also need to gather pertinent information concerning your building plan. (This will be everything from the house size to what contractors will be employed to build the home). Lenders will want to know everything about the home there is to know. Very often, the lender will send an employee to check on the construction’s progress.
Are you eager to build a new home?
Be aware that Arizona construction loans can be more convoluted than traditional mortgages. It is necessary to look at many lenders to find out their expectations of the borrower; learn their rates and terms. There will be many lenders that do not want to work with this type of loan. Typically, credit unions and smaller banks will be more wiling to work with you. Be sure that before you shop around for a contractor you are pre-approved for a loan. Once you work with a contractor you will pay for blueprints and the design of the home. Wait until you know where your funds are coming from before diving into this project.
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Dennis Dahlberg Broker/RI/CEO
NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave | Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.