How to Compare Construction Mortgages

Home construction mortgages aren’t for everyone. However, if you are planning on building a home and need one of these specialized loans, you still have to perform due diligence to find the best loan. That means a side-by-side comparison of construction mortgages.

Instructions

Difficulty: Easy

1. Obtain construction loan quotes from a number of sources, including online mortgage brokers, banks and land-based mortgage lenders. Remember to include an extra 20% cushion in the amount you ask for to account for unexpected expenses.
2. Find the loan type. A "one time close" indicates you won’t have to acquire one loan during construction only to go through the loan process again once it's complete. If you like the loan application and closing process, disregard this one—and seek professional treatment. This is often called a permanent financing loan.
3. Check the approved loan amount. If it's not enough for your project, discard the loan or adjust your budget to fit the loan amount.
4. Locate the financing percentage.
   
   - Some lenders require you pay 10% or more of the construction cost, others offer 100% construction financing up to a certain level.
   - If you have the money to cover the 10% cost and the loan is a good one, then consider it. If you don’t, discard any loan offers that won’t cover 100%.
5. Compare the time limit of the construction of the house stipulated in the loan to your timeline. Discard any loans with a time limit that is too constricting.
6. Check the loan rate options you’ll be offered upon completion of construction. Some lenders offer lower interest rates once you’ve proven your proficiency and completed the building process.
7. Look at the requirements and mandatory documentation. If you don’t meet the requirements of any of the lenders, drop them from your list. Some of those requirements might include:
   
   - The right credit score. Some lenders require a credit score of 675 or greater. A few will permit scores as low as 620 into their program but will charge a higher interest rate.
   - Enough cash on hand. Lenders usually require at least 2 months of liquid assets that may include a 401(k), investment accounts, bank accounts or stocks.
   - An accurate project budget. Project budgets are an industry standard requirement for construction loans. Check and double check yours for accuracy.
   - Projected timeline. Construction completion time frames can make or break your loan. As with the budget, add a 20% cushion to the projected completion date and make sure you fit within the lender's requirements.
8. Eliminate any loan offers you don’t qualify for. You should have a rather short list of potential lenders at this point, where it's time to make a decision. Go for the one with the lowest payment.

Tips & Warnings

• Understand you will be paying a higher interest rate for the construction phase of the loan than you would be for a conventional loan. A superior loan will adjust itself to be in line with conventional loans after construction.
• Be prepared to work for your construction loan. There are a great number of banks that do not offer construction loans, but don’t let that discourage you. There are banks and lenders that do loan money for new home construction. You just have to be prepared to look for them.