Buying a new house will always be a huge expense. The majority of buyers do not have enough money in their accounts to make this purchase. This is why they opt for getting a mortgage. A mortgage is essentially a loan that gives your lender the right to take your property if you fail to repay them. To get a mortgage, you must have good credit and a steady income.
This article talks about mortgages on pre-construction homes and how it works. It also touches upon the factors that affect your eligibility to get a mortgage. Make sure you read till the end to garner a lot of useful information!
If you want to know more about construction and the pre-construction home market, this page might be helpful for you!
Mortgage For a Pre-construction Home
Let’s cut right to the chase! YES, you can get a mortgage for a pre-construction home. It might not be an easy process, but once you get through, it definitely pays off!
A traditional mortgage will not be of great help for pre-construction homes. What you need is a ‘construction mortgage.’ A construction mortgage is a loan given to the client when they are in the process of building their own home. Once your home is built, this turns into a regular mortgage.
The good side of this is that you do not have to apply for a mortgage again, as it will all count as one mortgage. Note that there’s another type of construction mortgage called the ‘standalone’ mortgage. Standalone mortgages are generally limited to just one year. The interest rates in these cases are higher, and they cannot be locked in. This means that they can easily fluctuate. But the good side is that they ask for a smaller down payment.
Therefore, you have two options when it comes to construction mortgages. Make sure to apply for the one that suits you the best.
Which Factors Do Lenders Consider?
Neither a bank nor an individual lender will give you any money until they do a thorough background check. This is done to determine if you are going to be able to pay off your loan. They consider several factors before approving or denying your application. Here are some of them:
1. Your Income
Your income is one of the first things a lender is going to check. You must have a steady job that will keep being your source of income while the mortgage lasts.
If you are self-employed, you might face some difficulties when looking for a loan. This is not exactly a steady income, which is why lenders tend to avoid the risk. Furthermore, they will zero in on your monthly income and whether you have enough money to repay them every month.
2. Assets
The lender will also check if you have any other properties in your possession. They do this as a security check if you do not pay off your mortgage or lose your source of income. Lenders like to be safe, which is why having more property will be an advantage for you.
Of course, pledging your property is always a bit risky because you might lose your possessions, but if you pay back your loan regularly, you have nothing to worry about!
3. Credit Score
Your credit score helps the lenders determine whether they should give you a loan or not. To calculate the credit score, your credit history comes under the scanner. This includes debt, all accounts you’ve opened in the past, repayment history, and much more.
It is important to note that a good credit score not only gets you a loan but also has some other benefits. For example, your down payment for a house might decrease thanks to a healthy credit score. This shows that you are trustworthy and do not present a considerable risk to the lender! Note that the required credit score depends on where you live.
Mortgage Pre-approval
For the construction work to begin, you must prove that the lender has approved your future mortgage. This is done to avoid wasting anybody’s time. The construction companies must know that you will be able to close the deal when the time comes.
The best option for you is to get pre-approval within the first week or two. This is good because you will immediately know if you will be able to endure this financially. If you realize that this might be too much on your wallet, you will still have the option to quit.
However, you should also note that getting pre-approved does not necessarily mean that you got the loan. The pre-approval generally only lasts up to 90 days. After that, you will have to talk to your lender again!
What Else Do I Need to Know?
There are several things that you need to understand when getting a mortgage for a pre-construction home. Here are some of them:
1. Lots of Paperwork
When proving your eligibility to the bank, you will have to bring a document for everything. You will need statements that prove your income, debt, current assets, and much more.
The lenders do not give out loans easily, which is why they need tons of proof that you will be able to repay them! Not only do they need to determine your credit score, but they also want to know about your plans and the project in general. You might have to give them a budget and a timetable as well.
2. Down Payment
A down payment is the amount of money that you pay at the very beginning. This counts as a part of the overall cost of the project. Buyers usually get loans to pay for the rest. Down payments for pre-construction homes tend to be very high because such projects represent a higher risk.
3. Banks or Brokers?
If you are looking for a loan, you should definitely hire a mortgage broker for help! They will assess your needs and help you find the best interest rates out there!
Endnote
Getting a pre-construction mortgage loan is a tedious process. Yes, you will have to go through several procedures and tons of paperwork, but it is not impossible to obtain one.
The traditional loan will not be of great help here; you need a ‘construction’ loan. If you are unsure of which bank and interest rates to choose, consider hiring an insurance broker for help. Make sure to be fully informed before making any decision!
