A construction loan is a short-term loan designed to help you build a house or other type of property. Often, construction loans are replaced by a more traditional mortgage once the home is finished. There are different structures for construction loans, so it’s important to understand how they work before you hire a contractor to start building your dream home in New Jersey.
Let’s take a look at how constructions work, including considerations that can impact your finances as you build your New Jersey home.
Best construction loans in New Jersey
Not every mortgage lender offers construction loans. Some banks won’t consider offering construction loans, which can make it difficult to fund your dream home project. Additionally, you might have different needs. For example, some lenders only offer commercial real estate loans or specialize in providing funding to investors who build multi-family units.
If you live in New Jersey and you’re looking to get a construction loan, here are some lenders you might consider, depending on the type of property you’re building and your individual needs.
|
5% on loans up to $1 million |
||
|
As low as 3% for some options. 20% on loans up to $1.5 million. |
||
Fulton Bank
It’s possible to get up to 85% funding on construction loans up to $2 million. You can get 95% construction funding on up to $1 million. Fulton Bank’s mortgage division offers different options, including construction-to-permanent with a one-time closing. You can choose from fixed and adjustable rates, and even choose an interest-only loan during construction.
Specific rate quotes can be gained by contacting Fulton. They lock the rates up front, but some loans might allow you to see a lower rate if the market changes during the construction phase. Make sure to get any rate agreement in writing as you go through the home building process in New Jersey.
Amboy Bank
Amboy Bank, headquartered in Old Bridge, New Jersey, focuses on making local decisions for your New Jersey construction loan. Like other lenders, Amboy Bank offers a one-time closing loan that provides you with money for construction and then converts to a permanent mortgage once the home is built. You can even use a bi-weekly payment schedule to speed up your ability to be mortgage-free.
This bank prides itself in offering a variety of custom options for borrowers, as well as for keeping the loan in its own portfolio, rather than selling it off. They have a long history of construction loans—more than 50 years. You need to contact them for specific rate quotes and terms.
Wintrust Mortgage
Wintrust Mortgage offers construction-to-permanent loans that allow you to complete the construction process and convert your New Jersey home construction loan into a long-term mortgage with one application.
Wintrust also offers a variety of different programs and options, including VA loans, which veterans can use to get 0% down. Additionally, it’s possible to get an FHA construction loan through Wintrust. You’ll need to call for a rate quote and learn more about what’s available in the current market.
TD Bank
The type of loan you can get through TD Bank, headquartered in Cherry Hill, New Jersey, depends on a number of factors, and you need to speak with a mortgage advisor if you want a construction loan. TD Bank also offers construction loans for renovation, so that’s an option if you buy a fixer-upper.
Not every type of dwelling is eligible for construction or renovation. TD Bank does offer construction loans for commercial real estate, but won’t provide financing for condos or co-ops. You can’t access VA and FHA construction loan programs though this lender.
First Bank
First Bank is a New Jersey institution that’s investor-backed and specializes in commercial building loans. You can get a construction loan for your commercial venture or to make major additions.
The bank doesn’t offer many details online, but you can contact them for more information about their programs and what you need to know about getting a construction loan through the bank.
Provident Bank
For the most part, Jersey City-based Provident Bank focuses on multi-family projects and tract development. They can provide construction financing to developers and investors. You can also access commercial real estate construction loans through this lender.
Provident Bank offers flexible terms and the ability to use a certain level of customization when it comes to loans. You need to call and speak with someone about your situation before moving forward.
New Sliver
New Silver is part of the American Association of Private Lenders. Basically, if you use this process, you’ll be funded by private lenders that invest in construction projects. It’s important to note that these types of loans are often short-term and won’t convert to permanent loans. These can be easier to get if you have fair credit rather than good credit, with a minimum credit score requirement of 650.
While you can get up to 100% for construction financing, you might have to pay a hefty interest rate, up to 13.25% APR. In general, this type of loan is best suited for an investor looking to build multi-family units that they can rent out quickly and pay off the construction financing. This type of lending often comes with higher risks to borrowers, so it’s important to pay attention to your finances and understand your financial risk tolerance before moving forward.
How do New Jersey construction loans work?
Construction loans are short-term loans, generally lasting one year to 18 or 24 months. They are designed to help cover the costs associated with building a home. They are meant to be paid off at the end of their period. However, many people can’t pay off that large of a cost at the end of the term, so they often use a more traditional mortgage to pay off the balance of the loan.
In general, construction loans are used to cover common costs associated with building a home in New Jersey:
- Purchasing land.
- Paying for contractor labor.
- Covering the cost of building materials.
- Paying for the required permits.
Because most building projects are designed to take less than a year, there is usually a time limit on your construction loan. You and your contractor usually need to provide a timeline to the lender, and you might need to give regular updates to ensure you’re sticking to a reasonable budget.
In fact, with a construction loan, you won’t receive a lump sum to complete your home building project. Instead, the lender will make payments to the contractor, based on project phases—which might require an inspector at each stage. During the construction loan term, you’ll likely only have to make interest payments. The principal is usually paid off at the end of the term with a mortgage with more conventional terms.
If you’re using the construction loan for different projects, such as commercial real estate or if you’re an investor building a multi-family property, there might be different requirements. Lenders offer different terms based on whether you plan to live in the property as a primary residence, rent it to others or flip the property to another buyer.
Types of construction loans in New Jersey
There are four main types of construction loan you can get when building in New Jersey. Understanding how each works can help you choose which type of loan is the right choice for you as you build your home or invest in a multi-family or commercial real estate project.
Construction-only loan
A construction-only loan is just what it sounds like—a loan designed to only cover the cost of building the house. If you get this type of loan, you’ll be required to have it paid off by the time construction is finished. If you want a longer mortgage, you’ll need to get that loan separately.
Some people who get construction-only loans do so because they expect a big enough lump sum from the sale of their previous home to pay off the loan, or they have a large amount of cash set aside. Those who get a traditional mortgage to pay off a construction-only loan need to submit a separate application.
This type of loan comes with two different loans and two different closings.
Construction-to-permanent loan
For those who only want one loan application and one closing, a construction-to-permanent loan can be a good choice. With this type of loan, the construction converts to a more traditional, usually fixed-rate loan once the construction phase is over.
However, the fixed-rate might not be locked in at the beginning of the construction process and might be reevaluated based on market rates at the time the loan changes from a construction loan to a mortgage. Review the agreement and clarify with your lender the terms of the new loan, and the requirements to lock in a lower fixed rate at the end of construction.
Owner-builder loan
If you have experience as a homebuilder, you might be able to act as your own general contractor, rather than employing someone else. In this case, the lender will make the funds from the loan available to you over the course of construction so you can cover all the costs.
This type of loan can be difficult to obtain, however. In addition to meeting credit and other criteria, you also need to have proper licenses to act as a contractor in New Jersey and show that you’re capable of fulfilling that role.
Depending on the situation, this loan might still require two closings, if it isn’t a construction-to-permanent loan.
Renovation loan
Finally, if you aren’t building new construction for your home, you can get a renovation loan. These loans are designed to cover the costs of major remodeling and upgrades, as well as the cost of permits that are usually required for renovation projects. Loan amounts are usually based on the likely value of the home once the renovations are finished.
People who get this type of construction loan in New Jersey usually do so because they plan to buy a fixer-upper and need some funds to complete remodeling. It’s possible to get a renovation loan that includes the cost of buying the property plus the costs of making the upgrades. Make sure you’re clear about the purpose of the loan so the lender knows how to underwrite the loan.
Pros and cons of construction loans
Before you decide to get a construction loan, it’s important to understand the advantages and disadvantages of this type of financing when you’re building a home in New Jersey.
Pros:
- Ability to customize your home with a new build
- Payments are often interest-only during the construction period, making them affordable initially
- Many residential construction lenders offer construction-to-permanent loans which convert easily into a traditional mortgage after the construction phase
Cons:
- Some of the underwriting requirements are harder to meet
- A construction-only loan is a short-term loan and often needs to be paid off within two years
- You must submit a construction timeline and delays can lead to increased costs and the potential to have the lender withdraw funding
Construction loan requirements in New Jersey
Every lender has its own criteria for construction loans, but in general, you might need to be prepared to meet the following requirements:
- Be prepared to provide 20% down, although some lenders will provide up to 95% of construction financing.
- Usually have a credit score of at least 680, although some lenders might offer programs that accept lower scores.
- Low debt-to-income ratio.
- Create a construction plan, complete with a timeline and budget at various stages of building.
- Appraisal for the finished project, so they have a basic idea of whether the home will be worth enough to serve as collateral.
Additionally, throughout the process, you might need to be prepared to allow for inspections. Usually, each phase of construction is accompanied by an inspection and you need to offer updates on timing and budget as you go along.
How to get a construction loan in New Jersey
If you’re building a newly-constructed home, getting a construction loan is usually more complicated than getting a traditional mortgage. Each lender has its own requirements, but some general steps to follow include:
Get a licensed general contractor to manage the building process
You need a licensed builder or contractor to complete the process. Most lenders require that the person building the home understand what they’re doing and are properly licensed to hire and oversee subcontractors. You can use the National Association of Home Builders to find local New Jersey builders who are likely to be qualified.
Provide necessary documents
Before you’re approved for a construction loan, you need to have documentation showing you have a construction plan and budget. There should be detailed plans of how the home should be built and how it will look when finished. You should also work with your builder to create a realistic timeline and budget for the project.
Other documents you need to gather often relate to your own financial situation. This can include your pay stubs and tax returns, as well as various account statements. Having all of this documentation gathered and prepared can smooth the process.
Obtain pre-approval for the construction loan
Go through the process of pre-approval to make sure you’re likely to get the loan—and to understand whether you’re likely to be approved for a mortgage at the end of the construction process.
During pre-approval, you’ll need to provide information about your down payment and your credit will be checked. Once you have pre-approval, you’ll have a better idea of whether the lender will provide funds for construction and what interest rate you’ll have to pay.
Get insurance coverage
Some lenders require that you get a homeowners insurance policy that includes builders risk coverage. This way, if something happens during construction that could put the home at risk as collateral, the lender can be compensated through the insurance. Homeowners insurance can protect against natural disasters, injuries on the construction site and other issues.
Frequently asked questions (FAQs)
What is the difference between a construction loan and a regular loan?
A construction loan is generally a short-term loan designed only to cover the costs related to building (or renovating) a home. A regular mortgage loan, by contrast, is usually a long-term loan meant to fund the purchase of a home. Depending on the structure of your construction loan, you might need to apply for two different loans if you decide to build a home.
How to roll a construction loan into a mortgage?
When getting the loan originally, choosing a construction-to-permanent loan can help you convert your construction loan into a more traditional mortgage without the need for two closings. Before getting a construction loan, make sure you understand the terms, and whether the lender will transition the construction loan to a mortgage without a second loan. Otherwise, you will need to obtain a separate, traditional mortgage to pay off the construction loan.
What credit score do you need for a construction loan in New Jersey?
Each lender has its own criteria, but in general, you’re likely to need a higher credit score for a construction loan than you’d need for a traditional mortgage. A good rule of thumb is to plan to have at least a 680 credit score if you want to get approved for a construction loan.
How long does it take to get a construction loan in New Jersey?
It can take weeks or months to get a construction loan. In general, approval and funding take longer than for a traditional mortgage due to the extra steps of submitting a plan. Additionally, construction loan funding doesn’t happen as a lump sum. Instead, the loan funds will be disbursed over the course of construction, as certain milestones are met.
Read the full article here