A construction loan is a favorable loan option for those who want to build a new home or renovate an existing property. These specialized loans are short-term and usually paid interest-only during the loan term which is typically a year at maximum.
The proceeds of a construction loan are not given in bulk but instead at intervals. Once the home is fully constructed, the borrower will now have to pay off the loan. That is when a refinancinghappens. The borrower gets another loan to satisfy the conditions of the old loan. Only this time, it is a permanent mortgage.
So how do you go about refinancing your construction loan?
- Inspect permits. See to it that the contractor received all permits required after passing every necessary inspection. There are various stages of construction, during which stages, an inspector comes to investigate if the job is done right. If unsatisfied, he recommends some changes.
By the time the construction is done, all the permits must already be in the hands of the contractors.
- Secure a COAor certificate of occupancy. This will show the lender that the house is legally ready to be occupied by the owners.
- Know if there are costs needing reimbursements. These are those additional costs that you paid out of pocket but are supposed to be included in the loan. Keep your receipts and proofs of purchase as they will be necessary to approve your reimbursements.
- Inquire around for interest rates and compare lenders. You are not strictly required to repeat business with your original lender. If you find a better deal with better terms, go ahead and jump on the opportunity. Remember that it’s your money at stake so being meticulous about who you deal with is fully justified.
- File out an application and forward all initial requirements to get pre-approved for the loan. Construction loans typically have strict requirements so if you qualified for a construction loan initially, you are more likely to get that pre-approval unless some financial setback affected you during the loan term.
- Get appraised. You will need the certificate of occupancy for this. The appraisal will determine the value of the home in the market and the loan amount that your lender will let you borrow.
- Finalize all the necessary documents for closing. Settle payments with the respective parties, and before signing on the dotted line, read the fine print and review the terms of the loan.
All things considered, refinancing a construction loan is just much like refinancing a regular mortgage. Much of the difficulty of the process is in getting the initial construction loan and finding the right people to provide this risky type of financing.
If this interests you, read more about out primer on Construction Loans to familiarize yourself with this loan option.