What Are Things You Need to Know About The Types of Construction Loans Chicago, IL?

construction loan

Are you considering building your own home? Then you should look into home building financing. In many aspects, house construction loans differ from home loans. Here’s a step-by-step introduction to the procedures and tax advantages involved with construction loans Chicago, IL.

What is a construction loan? An unsecured personal loan or a home equity loan can be used for house improvements. Because the funds are designed to be utilized for smaller one-time projects, the loan quantities are less than construction loans. A construction loan is a short-term loan secured by real estate that is used to pay for the land, supplies, and labor necessary to construct a new home.

Types of Construction Loans

Construction-only Loan

The funds from these construction loans are disbursed based on the proportion of the project finished, and the borrower is solely liable for interest payments on the money taken, similar to a construction-to-permanent loan.

Construction loans are considered riskier for the borrower because your financial situation may worsen during the construction process, preventing you from qualifying for a mortgage to repay the construction loan; as a result, you may be forced to sell your newly constructed home to repay the loan or find another means of repayment.

A down payment is required for both types of construction financing. The down payment monies are used initially to allow the builder to begin building. You can start drawing cash from your construction loan to cover building charges after the down payment amounts are depleted.

Construction-to-Permanent Loan

Construction-to-permanent loans combine construction and mortgage finance into one convenient package. In most cases, this is a “single-closing” deal in which a single lender provides the full solution and the conditions are set in stone up front, protecting you from rising interest rates.

The construction loan is often a 1-2 year loan with interest-only payments and no principal payments. When the project is finished, the loan is converted to a permanent mortgage, and you must make payments that cover both interest and principal.

What Distinguishes A Construction-to-Permanent Loan from A Mortgage Application?

A construction-to-permanent loan and standard mortgage finance have extremely comparable application processes. Unlike a standard mortgage, though, you’ll be required to present construction-related papers, such as the contract you signed with the builder, as well as building drawings and specifications. The cost of your house, including choices, improvements, and lot value, is normally specified in the building agreement with your builder. You’ll also need a copy of the house’s floor plan and facade, if relevant, as well as a deed to the land. Because of the additional information that has to be evaluated, the approval process may take a little longer.

Construction loans are available from most banks and lenders that offer standard mortgages. You may also inquire with your house builder to see if any specific financing solutions are recommended.

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