Ultimate Guide for Construction Loans in California

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As the price for houses skyrocket, many first-time buyers nowadays are considering a cheaper alternative to buying a house, including building their own. Are you looking for construction loans in California?

To ease your process, we’ve put together this short but comprehensive guide for understanding everything about construction loans.

Let’s dive right in!

Definition of Construction Loans in California

Construction loans, sometimes also referred to as home construction loans in the States, are a type of short-term loan used to fund the costs of building a home. The typical interest rate for a construction loan is higher than other mortgages, while repayment usually begins between 4 to 24 months after securing the loan.

On that note, a residential construction loan simply refers to a loan made for a residential property, where the loaned money is used to fund the construction.

It is possible to convert the loan into a conventional mortgage or pay it off as a lump sum, so you can choose the option that works best for your financial situation. This will also depend on your credit history and lender.

Best Construction Loans Rates

There are many banks and lenders that can give you a construction loan, so we highly recommend doing your research or talking to a financial advisor before you make your decision.

Just Funded Mortgage is known for their particularly low rate and can be an appealing option If you want to borrow online or a fast approval.

How to Get the Best Construction Loans Rates

Do you need to shop around when applying for a construction loan? The short answer is yes. Just like any other loan or mortgage, it is always a great idea to compare multiple lenders, so that you can secure the best deal.

Note that you only have to pay the interest during the building stage of your home, but this means that construction loan rates tend to be higher than a traditional mortgage.

How To Get Construction Loans in California

It is generally more difficult to get approval for construction loans in California, especially when you compare it to regular mortgage. This is because there is additional risk during the building stage as there is no physical asset to back up the loan. But that isn’t to say that you can’t get approved for a construction loan!

What are the requirements for a construction loan?

You may be wondering what the requirements are for a construction loan, so we’ve summarized the most essential and most common things lenders will ask for.

Credit score: The first thing you need to submit is your credit score, which can affect your approval and interest rate. The bare minimum would be 620 for USDA and VA loans, but you can apply for an FHA construction loan if you have at least 580 credit score.

Down payment: Down payment is surprisingly not that much higher than a traditional mortgage loan. This is usually around 3.5% if approved by the HUD or 10% for non-HUD approved loans. That said, VA construction loans don’t require you to pay anything upfront.

Construction plan: This is where construction loans can be a bit different than regular mortgages, as you need to submit the home plan. From the blueprint and specs, your lender will want to know the details and whether they comply with local building codes.

Construction contractor and contract: Finally, you also need to inform your lender of who your contractor is. They might also want to review the contract you have for the construction project, including the budget and cash flow.

Types of Construction Loans in California

There are two main types of construction loans that you can find. The first one is a one-time close, which means that the loan can automatically convert to a traditional mortgage once construction has finished. It’s a simple and straightforward process.

Then, there is the two-time close loan. This consists of two different loans to cover the construction phase and the mortgage phase. It’s a great alternative if you want to shop for the best possible rates but does mean that you need to apply twice.

To Sum Up

All in all, you can easily apply for construction loans in California as long as you have enough credit score and find the right deal. Remember that not all lenders offer this type of loan, so be sure to ask around and spend some time researching. Moreover, construction loan rates are usually higher than conventional mortgage because they are riskier.

One of our best tips for preparing your loan application is to on an online home construction loan calculator. There are many free resources on the internet that can give you a detailed breakdown of the rates and payment you will need to make, given your finances.