Construction Loans for Modular Homes
So you're thinking about building a new home...congratulations! You're about to embark on a journey to create your dream home, a new place to live where everything is just the way you want it.
Whether you choose to build your home in a traditional stick-build method or by using modern modular building techniques (and there are so many reasons to choose modular construction!), you will likely need to secure a loan to help pay for your new home.
While most people are familiar with how traditional mortgages work, many people don't know that these "regular" mortgages don't apply to new construction homes and that they will need to get a construction loan in order to build their new modular home.
This article will teach you the basics about construction loans and what to expect when shopping for a construction loan for your new modular home.
What is a Construction Loan?
Simply put, construction loans help take care of the cost of building a home. They differ from traditional home loans in that they cater specifically to the construction of a new home and don't apply to properties that are already built or those that need renovation.
What does a Construction Loan Entail?
Construction loans cover the cost of virtually all the aspects pertaining to building a home, including land, excavation, foundation, garages and decks, and of course the main part of the home itself.
Once your home builder has finished construction and you take possession of your new home, the bank will convert the construction loan into a traditional mortgage.
How are Construction Loans Different from Traditional Mortgages?
The term of a construction loan is normally three to four months, but can also last 12 months or longer. During that time, the buyer makes interest-only payments based on the amount of money that the builder draws out of the account for the various stages of construction. There are also permits that must be executed before construction can begin, and these are usually the first expenditures from the construction loan.
How to Get a Loan for a Modular Home
Ideally, when planning to build a home, banks will consider whether or not you have:
- Enough money saved up for a down payment or equity in the property
- A good credit score
- Proof of a stable income stream
This is the general information a bank will require when assessing your construction loan application. A pre-approval letter signed off by a lender will be handed over, which is going to communicate to your home builder that you are ready and able to finance the construction of your modular home.