When you are building rather than purchasing an existing building, structure, or home, the loan requirements are different. Understanding these Arizona Construction Loans is critical to the success of your project.
There are two main categories of Arizona Construction Loans. The first is a construction to permanent loan. In these Loans, the money to build the structure is advanced to the contractors in stages. The balance of the loan becomes the permanent mortgage after the construction is completed. A stand-alone construction loan only covers the cost of building the structure. Once the building is completed, the owner must then secure a mortgage or be able to cover the cost of the construction loan in cash. And while this sounds like a great way to build a structure or home, few people have the resources to allow them to pay cash once the construction phase is finished.
The most significant benefit to selecting a construction to permanent loan is that the borrower only goes through the long and arduous process of securing a loan once. This means that all of the paperwork and credit reports are only done for the initial loan and then reused to obtain the final longer-term mortgage. The mortgage can be either 15 or 30 years and is just like any other mortgage that you might secure with either a fixed or adjustable rate. An added benefit with only one set of documents and credit checks is that there are fewer fees for the borrower to pay.
Using stand-alone Arizona Construction Loans allows the borrower a bit more flexibility when choosing a long term mortgage. In most cases, lenders will not offer VA or FHA Loans for a construction to permanent loan. But with a stand-alone loan, the borrower can secure these reduced-cost Loans as their long term mortgage. But the price to be paid for the selection is that you must qualify for the two Loans separately. That means maintaining a high credit score and low debt to income ratio for a more extended period of time.
When you are deciding if you want to go through the loan application and approval process twice, consider all of the factors that could slow down the construction process. This could include a lack of materials, difficulty obtaining obscure materials, or even a long stretch of bad weather. With the two in one loan format, the time extension is not as big an issue, but if you are getting a second loan as your long term mortgage, a time change could add challenges.
Securing a construction loan is much like qualifying for a traditional mortgage. You need to show a very good credit score and also be able to make a down payment of 20% or more. Because the home or structure is not completed, it cannot be used as the collateral for the loan. In these cases, the lender will require specific documentation from the builder to secure the loan. Additional information about the builder could also be necessary to ensure that they have credibility and experience. If building appeals to you more than buying an existing property, it is vital to research the process of using a construction loan so that you can make a well-informed choice.
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.