Our construction loan through First Savings offers a variable rate that moves up and down with the prime rate. Our construction loan rate is higher than our traditional mortgage loan rates. With a traditional mortgage, your home acts as collateral — and if you default on your payments, the servicer can seize your home. With a rehab/ construction loan, we don’t have that option, so we view these loans as bigger risks.
The amount you can borrow for a renovation depends on an appraiser’s estimate of value once repairs and upgrades are complete. The lender still needs to approve your contractor and renovation plans, and it still pays the money in installments
Because construction loans are on such a short timetable and they’re dependent on the completion of the project, the borrower needs to provide us with a construction timeline, detailed plans and a realistic budget.
Once approved, the borrower will be put on a draw schedule that follows the project’s construction stages, and will typically be expected to make only interest payments during construction. We first have to approve the draw schedule. Unlike personal loans that make a lump-sum payment, we pay out the money in stages as work on the home progresses. The borrower is only obligated to repay interest on any funds drawn to date until construction is completed.
While the rehab work is being done, the appraiser or inspector check the house during the various stages of construction. If approved by the appraiser, First Savings makes additional payments to the contractor or owner, known as “draws.”
Once the house is complete we refinance the construction loan to a second trust or roll it in with the first for one first lien.
Prepare for the Builder Review
A mortgage is a transaction between First Savings and a borrower, but construction loans add a third party to the mix: the builder. Everything hinges on your contractor’s ability to complete the construction plans on time and within budget, so hire carefully.
“Check the builder’s references and look at other work they’ve completed. Make sure their plans and specifications are approved by the local building authority and they’re ready to move forward on the project,”.
We may request your builder’s work history and proof of insurance, blueprints, specifications, a materials list, a detailed budget and a signed construction contract that includes start and finish dates.
As with all mortgages, the minimum credit score, maximum debt-to-income ratio and down payment required for a construction loan will vary. In most cases, these requirements are based on the amount of money you borrow.
We will review your:
- Debt-to-income ratio: generally expect your debts to total no more than 45% of your income, and lower is better.
- Credit score: Our construction loans require a credit score of 720 or higher.
- Down payment: A 20% to 30% down payment is typically required for new construction, but our renovation loan programs may allow less.