A construction conversion mortgage provides permanent funding that replaces interim funding for the construction of a new house built on site or a new prefabricated home that will be permanently placed on the property. Permanent construction financing is a type of loan that allows you to build or renovate your home. When the construction process is complete, this loan becomes a traditional mortgage without you having to go through another closing. You'll only have to pay for one set of closing costs.
When making home improvements, you may want to choose between a construction loan and a home equity line of credit. In addition, before you can apply for a construction loan, you'll need to submit a construction contract, a construction schedule, designs, and a realistic budget. A construction loan is riskier for a lender because you can't use an existing home as collateral if you can't repay the loan, so the borrower must meet many eligibility requirements. Lenders can, when necessary to complete the construction, extend the original period to a total of no more than 18 months, but the documents cannot indicate an initial construction period or a subsequent extension of more than 12 months.
Now, let's cover the specific benefits of a construction loan to permanent for the construction of your home. The income tax law allows pre-construction interest to be claimed only after the construction has been completed in 5 equal installments. Ideally, you should have much more cash after you sell your current home and can continue to live in your home while the second property is under construction. The construction loan period for single-closing transactions from construction to permanent transactions cannot have a single period of more than 12 months and the total period cannot exceed 18 months.
To protect against these problems, loan requirements for construction to permanent loans require that you have the following. A construction conversion mortgage funds the construction of the home and then becomes a regular mortgage loan, avoiding the hassle of having two separate loans. By taking out a construction loan and a permanent mortgage at the same time, you also avoid any changes in the market during or after construction. In reality, borrowers never touch the funds available through construction loans because they are paid directly to the builder.
These types of loans generally require the borrower to demonstrate, through experience, education and licensing, that they have the knowledge necessary to supervise the construction of the home. During the construction period, or whenever you want to get more funding for loans, the lender will conduct inspections to see how the project is progressing.