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TERMINOLOGY
A construction loan interest-only is one that is used by a homeowner that is building a home. The loan offers a borrower to pay for only the interest on a loan during the construction period. The balance of the loan remains unchanged. Once the construction is completed, the loan is repaid or rolled into a new one, typically part of the mortgage for the new home.
Locate a Lender
Prior to applying for the loan, the borrower has to secure the land. The land, and its equity, establishes the total loan amount. A lender will not make a construction loan interest-only to a borrower who has not first purchased the land.
Provide Application Information
After the land purchase, the borrower will need to provide information for the loan application including name, current address, assets, liabilities and debts, income and any other property or home owned. The lender will need a complete financial picture of the borrower to make sure that they will be able to make the interest payments on a regular basis during the construction phase.
A construction loan interest-only differs from a traditional mortgage loan in that they are not meant for long-term financing. Once the home is built, the lender expects to be paid in full, unless an agreement is made to include the principal amount of the loan into the mortgage loan.
Must Have a Good Credit Score
Credit is very important for a construction loan interest-only. A low credit score is an automatic denial for these loans. Lenders will be firm on the minimum number that they will accept so a person with bad credit should not bother applying for this type of loan. With credit standards tightening in the wake of the financial disaster, lenders do not want to take chances with borrowers who may potentially default on the loan.
Meet with the Loan Officer
The borrower will meet with the loan officer of the lender to discuss the loan application. The loan officer will further assist the borrower by answering any questions they may have and complete any unfinished items on the application. Also, the loan officer will collect all supporting documentation, such as paystubs, bank statements, W2s and other necessary information. The loan officer will also flag any concerns with the borrower prior to submitting the loan request to the lender for consideration. This is the process for obtaining a construction loan interest-only.
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