Building your dream home sounds like a fantasy only attainable by the very wealthy. The truth is that, while buying one of the many Calgary homes for sale can still be cheaper than building a home, it’s a completely possible goal for those with good savings and a great credit score. If you want to prepare yourself financially for building the home you’ve always wanted, you should first understand how a construction loan works.
Types of Construction Loans
There are a few different types of loans involved in home construction. Normally, you’ll apply for a construction loan that covers the cost of building the structure. Then, you’ll have a typical mortgage that begins upon completion of the home. These two can be part of the same loan process, or it can be from two separate lenders. Loans that convert are called construction-to-permanent loans, while doing them separately would involve getting a construction-only loan, and then a regular mortgage (sometimes called an end loan).
If you’re looking to gut an already existing property and make major construction changes, there’s a separate type of loan for this called a renovation loan. Finally, if you’re qualified to build the property yourself, you may be able to apply for an owner-builder loan.
Finding a Builder
Before applying for a construction loan, you’ll have to first choose a builder. This step may seem out of order, but part of the approval process involves showing the blueprint to the lenders so they can assess the home’s potential worth. They’ll also want to know your builder has a good record of finishing homes and producing work of good quality before they agree to work with you to help fund your new home.
When it comes to the approval process, construction loans are undoubtedly more difficult. If you take this route, expect to pay a larger deposit – often 20-30% instead of the typical 20% with a standard mortgage. You’ll also need to be a more desirable borrower, which means getting your credit score in order. You should have at least a 680 credit score, if not higher, to qualify. Also, make sure your debt-to-income ratio is as low as possible, but definitely lower than 45%.
The reason these types of loans have higher standards is because it’s a riskier endeavor on the part of the lender, than a home that’s already built. The majority of the property value will come from a finished home, and your lender cannot seize the home and resell it in the event you’re unable to pay if the home doesn’t exist. If something goes awry during the building process, the lender has no way to recoup their loss, which is the reason for these strict qualifications.