CONSTRUCTION LOANS

What is a Construction Loan?

---

Are you thinking of building your own home? You’ll need construction loans in Colorado to do it and it’s different than your traditional mortgage. Lenders have a lot more at stake when you build a home than when you buy an existing home (or a cookie-cutter home from a builder).

I have many years of experience helping homebuyers secure attractive financing for their home construction needs. Check out what construction loans look like and how you qualify.

Understanding the Construction Loan in Colorado

Construction loans are temporary loans (short-term loans). You borrow the funds to build the home, and then you must convert it to a permanent loan (standard mortgage).

Construction loans pay contractors to buy materials and build the home. Lenders pay contractors in installments based on the agreed-upon schedule and satisfactory inspections proving the work is done.

After construction is complete, you do one of two things – pay the construction loan off in full (rare) or convert it to a permanent mortgage.

Construction loans may include some or all of the following costs:

• Cost to buy the land, materials, and labor
• Cost of plans and city permits
• Costs to close the loan(s)
• Reserves in case something unexpected occurs during building
• Reserves to cover the interest costs owed during the building process

During the ‘construction phase,’ you only make interest payments on the amount disbursed. This enables you to afford your housing payments for the house you currently live while construction continues on your home. You may include the interest costs in your loan amount, drawing from the loan to pay the interest or pay the fees yourself.

Qualifying for a Construction Loan

Qualifying for a construction loan in Colorado is a little trickier because there’s no collateral. If you don’t make your payments there’s nothing for lenders to take back. Because of this, you must meet the underwriting requirements. Each lender differs, but in general, expect:

• A minimum credit score of 700
• Max debt-to-income ratio allowances of 43 – 45%
• Down payment requirements based on occupancy type (see below)
• Stable income and employment
• Proof you can afford the interest payments plus payments for your current housing

\t\t\t\t\t\t\t\t\t

Conventional Construction Loan LTV and Down Payment Guidelines

Conventional one-time close construction loans are available for primary residences, second homes, and investment properties. The maximum loan-to-value (LTV) and minimum down payment depend on the occupancy type:

Note: Loans over 80% LTV require mortgage insurance. LTV may be reduced by 10% for properties in a declining or high-risk market. Rate/term refinance maximum LTV for investment properties is 75% (1 unit). The maximum construction period is typically 11 months. These are general conventional construction loan guidelines \xe2\x80\x93 VA construction loans allow up to 100% financing with no down payment for eligible veterans.

In addition, you must discuss how you’ll pay off the balance of the construction loan once the building is complete. The most popular option is a single close (one-time close) construction loan, which combines your construction financing and permanent mortgage into one closing – saving you time, money, and the uncertainty of qualifying for a second loan.

Construction Loan Options for Every Situation

Whether you are working with a licensed general contractor or planning to act as your own builder (owner-builder), there are construction loan options available. Builder-managed projects are easier to finance because lenders prefer the accountability and experience a licensed contractor provides. Owner-builder projects have stricter requirements but are possible with the right qualifications.

Veterans and active-duty service members have an additional advantage with VA one-time close construction loans, which offer 100% financing (no down payment) with a minimum credit score of just 580. VA construction loans are available for primary residences only and can be structured as either a purchase (if you do not own the lot yet) or a refinance (if you already own the lot). Learn more about the types of construction loans available, including single close, two-close, renovation, and VA construction options.

Have more questions about how construction loans work? Check out our Construction Loan FAQs for answers to the most commonly asked questions.

Contact For A Free Consultation