It must be exciting to buy a house for the first time or to construct your own home. If you are planning to a your perfect house from the ground up and need to fund the construction project, you might wonder, “Can first time home buyers get a construction loan?”. The encouraging point is, yes, it’s possible!
There may be some confusion about getting a construction loan. We will clear all of your confusion regarding building your dream home with a construction loan by telling you the criteria for first-time buyers, pros and cons, and some dos and don’ts.
Stay with us until the end so you can take your first bold step into homeownership.
What is a Construction Loan?
A construction loan is a type of short-term home loan for 12-18 months. First-time home buyers can submit their loan application for construction that helps them build a home of their own.
These construction loans can be used differently from traditional mortgage loan options:
- Construction loans are funded in stages for your home while it’s being built, which matches the construction cost.
- Construction loan interest rates are based on construction loans only.
At the end of the loan term, the particular loan is either paid in full or converted to a permanent loan.
First-Time Buyers Can Get a Construction Loan
Are you buying your first home? If so, there is a wide variety of options available for first time home buyers. You will be surprised to know that first-time and non-experienced homebuyers can get a conventional construction loan offered as a mortgage.
How Does a Construction Loan Work?
Before you apply for a home equity loan or any type of construction financing, design the blueprints of your home to your specifications. Without blueprints, you won’t be able to identify how much loan you need according to the construction. That is why you will need an architect so you can design your perfect home according to your attributes and budget.
Furthermore, for a custom home construction, you will need more finances and home equity than you suppose. At the beginning, you will have to pay the rents out of your pocket, as for designs, architects, engineers, etc. Afterwards, all these costs of building a home are reimbursed through the construction loan (if included in the loan agreement) once your project is completed. Thus, these loan automatically converts into the construction loan.
The Right Type of Loan
Now your blueprints are ready, find the right type of construction loan to build your dream home that matches your finances.
- Standalone Construction Loan: It is a short-term loan that covers first-time home building expenses. When the construction phase is completed, the borrower should apply for a traditional mortgage to convert of construction to permanent loan.
- All-in-One Construction Loan: It is a type of loan that helps finance building a new home initially, then automatically transfers it into a loan mortgage. It is actually a one-time close construction loan.
Down Payment Issues
Can first time home buyers get a construction loan if they do not have a down payment? Being a first-time home buyer, you must know that a down payment is needed in most cases, except VA loans, even if you’re building your home on your land.
For FHA mortgages, borrowers should be prepared for the down payment of 3.5% when they apply for a construction loan. However, it varies for conventional loans based on several factors.
Require Some Extra Planning
Constructing a home to your requirements comes with challenges. It means you will need to hire approved contracts and architectural plans. As some of the lenders will not allow you to be your own builder, don’t try to cut corners on the charges of your construction loan, and know all of your questions you need to ask as a first time home buyer.
It is a long and slow process, so you can’t be in a hurry with it. You will need proper permit forms in such a busy housing market. Furthermore, working with a certified realtor like Nitin Kumar is more suitable to prevent unforeseen mishaps.
The Construction Loan Process at a Glance
Navigating a construction loan might be complex, but step-by-step makes it more manageable. Here is a quick overview:
- Get Pre-Approved: Schedule a meeting with a loan officer to get your loan pre-approved.
- Documentation: Submit all borrower, builder, and design documentation.
- Loan Disclosure and Approval: The bank provides your loan disclosure and approves your builder and project.
- Appraisal and Underwriting: The home is appraised and handed over to an underwriter to review.
- Insurance and Terms Finalized:After the final consent, the construction insurance is set up, and the terms and conditions of construction loans are confirmed.
- Signing and Closing: Sign documents and pay closing costs.
- Loan Fund and Construction Process Initiation: The construction loan is funded, and construction begins.
- Drawings and Interest Payment: Payments are made as construction progresses. Interests are paid on the amount owed.
- Loan Completion: Once your house construction is complete, your loan will be paid off or maybe converted into a construction-to-permanent loan.
FHA One-Time Close Loan
You can get an FHA construction loan with the FHA one-time program. It offers first-time homebuyers loans to qualifying borrowers. This loan program is especially for first-time homebuyers because they have low credit scores and down payment requirements. But this must be kept in mind that FHA loans limit you, as FHA construction loans are insured by PMI.
FHA construction loan requirements include a 3.5% down payment for first-time home buyers building a home with the life of the loan, which is much lower than other related construction loans. FHA construction loans require payment, for which you can use a part of your land to pay for down payments.
You might be eligible for down payments through some federal and state government programs. These programs can help you cover part of or your whole down payment if you have low income or are building in an underserved area through FHA lenders.
Qualifying for First-Time Homebuyer FHA Loan
You can qualify for the loan under some terms and conditions to finance the construction. It depends on the types of construction loans and how much you can afford. It also depends on the down payments, as some of them require 10% and some 20%.
Pros And Cons of Construction Loans
Traditional loans are the most common way to build a house for first-time homebuyers. But do you think these loans are worth it?
Pros
- Construction loans are short-term loans
- It helps you build your house according to your preference and personal style.
- Loans are disbursed in phases, making management easy.
- You pay loan rates on the amount drawn, not the whole loan amount.
Cons
- Your loan payments begin after the lender starts giving you money to pay for the construction work.
- With a regular mortgage, payments don’t begin until the settlement, when all the paperwork is done.
- Interest rates on construction loans are riskier than some other mortgage loans.
- They require higher security.
Conclusion
So, can first time home buyers get a construction loan? Yes, you can get a construction loan as a first-time homebuyer, however, you will have to carefully plan and prepare financially. Construction loans require a willingness to navigate and have a more complex process than a standard mortgage. Whether standalone or all-in-one, construction loans allow you to build your house with your custom designs, but have more strict construction loan requirements, higher costs, and a more involved approach.
FHA One-time Close Loans and other similar loans make it easier for first-time buyers through lower down payments and flexible credit score requirements. Nevertheless, you will have to invest more upfront in blueprints, permits, and professional help.
Construction loans might not be the easiest route, but they are accessible including construction-to-permanent loans, even for first-time home buyers. Ready to take your next step to build your dream home? Get in touch with us to explore your options related to reducing your construction costs.
Frequently Asked Questions
Q: What is a first-time home buyer grant?
A: A first-time home buyer grant is a financial assistance designed for first-time home buyers who plan to use the home as a primary residence. Unlike other grants, you don’t have to repay the grant if you are a home buyer and have limited savings for your first home purchase.
Q: What is an FHA construction loan?
A: FHA or Federal Housing Authority loans are government-sponsored loans for first-time home buyers. With FHA, you can build your customized house. One of the most attractive features of this loan is that it pays off the architect’s fee and the completion certificate.
Q: What is a first-time home builder loan interest rate?
A: As in different states, interest rates vary, based on the house size and the loan type. It also depends on the duration of the loan. Construction loans are for short terms, so interest rates are charged for 12 to 24 months with monthly interest charges.
Q: Can first-time home buyers get a renovation loan?
A: Yes, you are able to obtain renovation loans to finance both the purchase of a house and the cost of renovations as a first-time homebuyer. Some renovation costs are automatically added in a construction loan with some terms and conditions.
