Do you find yourself thinking about building your dream house? Maybe you’ve been shopping for a house for a while and you just can’t seem to find the right one. If you’re considering building a house, you’ll likely need to get a loan to cover the costs. These types of loans are different than the standard mortgage you would get if you bought a house that was already built.
What is a Louisiana Construction Loan?
What you are going to need is a construction loan. A construction loan is designed to help you finance the costs of purchasing land and building a house.
Construction loans will usually come with higher interest rates and be shorter in term. Construction loans are usually good for about 1 year- which is typically enough time to get your house built.
New Construction Loans in Louisiana
If you are planning to build a house in Louisiana you’ll need to determine which construction loan is right for you.
Construction to Permanent Loans in Louisiana
These loans are often referred to as one-time-close construction loans. This is because you finance the building of the house and the finished result all at one time.
The benefits of construction to permanent loans:
- Only pay closing costs once
- Lock in your interest rate at the time of building
- Removes the hassle of closing twice
The cons of construction-to-permanent loans are that the interest rates are often higher. Also, because you lock your rate in early on, you’ll be stuck with the rate you originally received.
This could make your monthly payment higher than just doing a construction-only loan and closing twice.
The construction-only loan allows you to finance the cost of purchasing a lot and constructing your house. Once the loan reaches maturity or the construction is done, you’ll either need to pay the loan in full or refinance it.
Now, this isn’t as scary as it sounds. Most people who use this type of loan with simply refinance the mortgage with a lender.
The benefit of doing it this way is you’ll be able to finance your house for 15,20 or 30 years with a standard interest rate.
Another benefit of doing it this way is that you are usually able to roll in the closing costs into your loan. This helps alleviate some of the burdens of having to pay closing costs twice.
Can You Buy Land with a Louisiana Construction Loan?
Most banks and mortgage lenders will allow you to purchase the land with your construction loan in Louisiana. This will allow you to find the perfect piece of property and finance the lot and the build all at once.
If you already own your own lot, you can also use it as collateral for your construction loan.
Louisiana Construction Loan Requirements
The requirements to get a Construction loan will vary depending on the lender or bank. It will also vary based on the loan program you use. Most banks will only do construction loans for conventional borrowers which have more strict requirements.
Conventional Construction Loan Requirements:
- Minimum Credit Score of 680 or higher
- 5% Minimum Down Payment
- No Derogatory Credit History
- 45% Max Debt-To-Income Ratio
There are other loan programs available for construction loans but finding a lender can be more difficult. USDA, VA, and FHA all have their own construction loan programs with easier credit and down payment requirements.
How Do Construction Loans Work in Louisiana?
Construction loans work a little differently than your normal mortgage loan. Since the purpose of the loan is to build your house, the terms and conditions are different.
- Construction Loans Have Shorter Terms:Construction loans will typically be for 12-month terms. Since the average time to build a house is somewhere between six and nine months this is usually enough time. Many times if your project becomes delayed and you will exceed the 12-month timeline, the bank can extend your loan.
- Construction Loans Are Interest Only: Most of the time your construction loan is going to be interest only. This means the amount you pay each month while building your house will only cover the interest of the mortgage.
- Higher Interest Rates: Since construction loans are short-term and viewed as riskier loans, interest rates will be higher than a standard 15 or 30-year mortgage.
- Construction Loans Have Draws: The money to pay for your house is not provided to the contractor all at once. This is done to protect you and the bank from becoming a victim of contractor fraud. The draws are typically between 6 and 10 and are paid out after a major milestone of the project.
What Does a Construction Loan Cover in Louisiana
- Construction loans cover:
- Cost of your land
- Contract labor
- Building materials
Your construction loan will not cover things like furniture and electronics for your new house.
Should I Build a House?
Hopefully, now you know at least a little bit about how construction loans work. The question you have to ask yourself is whether or not building a house is right for you.
Questions to ask before building:
- What’s Your Budget?
- Can You Supervise The Work?
- Do Long Projects Stress You Out?
- Do You Have Enough Saved?
These are all very important questions you need to ask yourself before trying to build a house. Many times if you have a small budget, it will be cheaper to buy a spec house or a house already built.
If you don’t have the time to supervise the construction process you may also consider waiting. Building a house is an intense endeavor and will require your time and attention to ensure the home is built properly.
Finally, you need to ensure you have more than the down payment and closing costs saved in the event you run into issues; and let’s face you will.
How to Get a Construction Loan in Louisiana
If you are looking to get a construction loan first you’ll need to follow certain steps to ensure a smooth process.
- Get Pre-Approved: Calling a bank or lender to get approved should be the first step. Before you get to far in the process and spend money on plans and other expenses, make sure you can get the loan.
- Meet with a Builder: You want to find a reputable builder who can help you draw plans and provide an estimate for the project. Make sure it’s someone with good reviews and local to your community.
- Submit Your Document to The Bank: Once you’ve met with your builder and received a draft of the plans, you’ll want to submit those to your lender and get the process started.
Building a house can be an exciting adventure if the timing is right or if can be a huge headache. If you follow these steps you’ll have a much smoother process. So now the only question to ask is…Are you ready to build a house?