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Originally Posted On: https://constructionspecloans.com/how-do-builder-construction-spec-loans-work/
Did you know that 64% of people say that they’ll be able to own or rent their dream home within their lifetime? However, not every dream home is currently on the market.
For a lot of people, their dream home needs to be built to have everything they desire. A construction project of this manner requires more than an ordinary loan, you’ll need a builder construction spec loan.
What exactly is a spec construction loan and how does it work? Read on to find out.
What Is a Spec Construction Loan?
A builder construction spec loan allows you to custom design your future home. Your involvement in the process starts from the beginning so that you have input on the layout of the home.
You can choose everything from the location to the sizes of the rooms. You’ll also pick custom finishes like cabinetry, countertops, and floors.
This speculative loan works as a special allowance to accommodate a home that has not been built yet. Generally, no one can predict the finances needed to complete a construction project so the lender approves a project proposal.
The lender will approve the project proposal based on the floor plan, approximate budget, and timeline.
As the borrower, you will pay interest-only during the construction phase. After the home is built, you will take full possession of the total loan figure. You’ll be responsible for the final principal and interest of the loan.
Spec Construction Loan vs. Mortgage Loan
A spec project loan tends to be short-term while mortgages are paid for anywhere between 15 and 30 years. The loan requirements for spec tend to max out after one year.
Because semi-custom home loans come with higher interest rates, the loan should be short-term. Lenders take on a greater risk with spec properties which is why interest rates increase.
The house will serve as collateral as stated in the loan terms for a mortgage. Because a home is merely a detailed project plan before being built, the value of the construction project is less. It won’t serve as collateral for the loan.
Once the home is completed, the construction loan will work similarly to a traditional mortgage. You’ll pay off the remaining debt as you would with the cost of a home that was already built.
How to Qualify for a Builder Construction Spec Loan
Finding a speculative construction project is not always easy. The process tends to be confusing for those who haven’t gone through it before.
It takes more than a higher credit score to secure a spec loan. There are different methods to be aware of that can help you qualify on a loan depending on your financial standings. Here are some things to consider:
Find a Broker
Having a broker by your side is beneficial because they can negotiate loan options for you. They’ll ensure the down payment and entire process will run as smoothly as possible.
Connect With a Large Bank
The largest banks can offer advantages on a spec loan that others cannot. Compared to smaller lenders, they can afford a smaller profit margin. A large bank might offer you lower rates.
Check Out a Community Bank
A community bank will be more in tune with the local market than a national bank. It might be easier to secure a loan with a community bank than it would with a large one.
However, since community banks cannot make as much money from small home loans, they are more apt to find sources of profit. An older community bank might offer you a better rate than a new one.
Find Alternative Lenders
Alternative lenders work with smaller builders more often than large and community banks do. Non-regulated lenders like financial groups or investment partners often have higher interest rates but are beneficial to builders.
Instead of focusing on your financial position, these lenders are going to consider whether or not you have the ability to complete the project. They will also consider the value of the completed home before providing a loan.
Shepard’s Finance works to fund valuable home projects through a 100% personalized experience. To gain help with your dream home, apply for a construction spec loan.
Applying for a Spec Loan
No matter what lender you choose to work with, the process of applying for a spec loan has some general steps. Here are three major factors you’ll need for the spec loan application:
Every lender will want to have an understanding of your current financial situation. Certain lenders will ask for different documentation, but have the following on hand to stay prepared:
- Previous tax statements
- Bank statements
- Asset and liability lists
If your builder is applying for the loan instead of you, a lender might ask them for statements about the profit and losses of their business.
If you own the property you are building on, you’ll need the deed to the land. You’ll also need deed restrictions and protective covenants.
Prepare general information about the property such as property age, type of construction, copies of old leases, and unit square footage. If applicable, you’ll need the list of materials and blueprints as well.
The work schedule is something you and the builder will have to create together. The draws must add up to 100% of the loan. The number of draws should relate to the work that is getting completed.
Financing Your Custom Dream Home
Unless you’ve been saving all your life to build your very own dream home, you probably don’t have the finances necessary to cover the costs. The first step of building any home is financing it.
With the right builder construction spec loan, you can bring your vision to life. Contact us today to learn how we can help you or ask how you can fill out a construction spec loan application.