Whether you’ve recently purchased land you want to build on or are currently considering it, you’ll most likely be in need of a construction loan. Here’s everything you need to know about getting a construction loan in Arizona so you can get quickly on your way to building your dream home!
What is a Construction Loan?
A construction loan is a specific sum of money that you will use to fund your building project. Like most other types of loans, a construction loan is paid back gradually in installments, according to pre-set rules laid down by the lender. Construction loans are often paid out by the lender in installments as well, usually as the project goes along and hits specified milestones.
Why You Shouldn’t Just Get a Regular Loan
You may be wondering why you shouldn’t just apply for a regular (lump sum) money loan that can be used for general purposes in order to fund your construction project. However, there are some great reasons to apply for a specific Construction Loan as opposed to a regular loan.
Because the loan is focused entirely around a construction project, the funds are released in stages as the project moves along. This helps you keep on track and stay within your budget, and it also means you will actively be using the money instead of getting approved for it and then just letting it sit (which happens all too often with regular loans). Furthermore, construction loans often come with more flexible terms than regular loans, allowing you to pay it back after the project is completed rather than expecting payments before you are done.
Consider a Hard Money Loan Instead of a Bank Loan
When it comes to home construction, a hard money loan is often the way to go instead of going through a bank. A hard money lender has less stringent rules on how the money can be used and when it needs to be paid off, giving you more time and flexibility with your project. While a hard money loan can sometimes cost you more in the long run than a bank loan, you are also more likely to get approved for one. This is because hard money lenders look more at the project’s potential and its likelihood of being completed rather than at personal credit scores and financial history.
Bank construction loans meanwhile have more stringent standards and can be difficult to get approved without either making significant changes to the construction plans or having a really solid credit and financial history. These types of loans are often “one size fits all”, and if you do not fit into their specific box of requirements, you will not get approved (and even if you do, the pay-back requirements can be very strict). Hard money construction loans are meanwhile more lenient, and they focus on the project as a whole rather than the specific person.
How to Apply for a Construction Loan
Banks require a ton of paperwork and documentation of financial history prior to approving you for a loan, but hard money lenders usually only require their application to be completed and do not need as much paperwork. That said, you will still need to outline your project and be able to show how you plan to achieve your construction goals. Bank approval can take days if not weeks, but approval from a hard money lender can come within 24 hours. Following approval, your property and project will still need to be appraised to ensure you are getting the money you need and that everything is in order.
Construction Loans Can Be Used for Land As Well
It’s worth noting that construction loans can also be used for purchasing land to build on (although they may sometimes have an add-on termed “land loan”). This can be very helpful if you are still in the initial stages of your project but have a clear idea of what you want to achieve. Once approved for your loan, you can buy the property of your dreams and start making your construction goals come to life!
Have more questions? Talk with a lender today about your options!