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Five FAQs about Renovation and Home Construction Loans

June 21, 2019 By: Great Midwest Bank

Great Midwest Bank has been Wisconsin’s Simply Local Home Mortgage Loan lender for over 80 years. Throughout the last eight decades, we’ve perfected our personalized, common-sense lending approach to products and services for the communities we serve. The expansive knowledge of our experienced loan officers makes them a great resource for those looking to buy, build, renovate or refinance. With customized options for Home Mortgage Loans, Home Construction Loans, Renovation Loans, and more, they’ve been around the block a time or two, and know the ins-and-outs of all things lending.

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Home Construction Loans have increased in popularity in recent years. We’ve also witnessed an increase in major home improvement projects that require financing: home additions, backyard upgrades, and kitchen and bathroom remodels. Fortunately for borrowers, local lenders are well-positioned to help navigate the nuances of a Home Construction or Renovation Loan. With home construction and renovation on the rise, we’ve compiled the answers to five frequently asked questions we often hear.

[Small Remodeling Tips that Pay Big Returns]

1. How is a Home Construction Loan different than a typical Home Mortgage Loan?

With typical Home Construction Loans, most homes are built in six-to-nine months, with larger projects taking up to a year. Borrowers have the flexibility of paying just interest on a growing principal balance during home construction followed by payments of principal and interest over a traditional time frame similar to that of a loan used for an existing home. An appraisal is still required, and is based on the home’s architectural plans and specifications, comparing it to other similar age and style homes in the vicinity.

The Home Construction Loan amount is based on the lower of either total costs or the appraisal. At closing, the borrower’s down payment is deposited in escrow and those funds are used first, typically towards a land purchase or early construction costs. Closing typically occurs within 30-45 days.

2. Are there any limits to the size of a Home Construction Loan?

At Great Midwest Bank, our average Home Construction Loan today is just under $500,000 – smaller for Major Renovation Loans (see question five below). There is not a minimum requirement; however, loans above an industry-standard $647,200 can mean higher rates, more costs and more restrictive underwriting requirements.

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3. I’m not quite ready to build, but I found a great lot. How does a Lot Loan work?

The process for financing land is similar to that of an existing home. Expect to have a larger percentage down payment and a shorter payback period, since land values are subject to greater fluctuation. Your current home’s equity can be a vehicle to provide funding for some – or all – of the land purchase. Closing takes about 30 days.

4. Do I need a larger down payment for a Home Construction Loan?

By using private mortgage insurance, we are able to offer some attractive low down payment options, even on Jumbo Loans.  This can be particularly helpful when borrowers prefer to remain in a current home during construction but requires sufficient income to carry two mortgage payments.

5. What’s involved in the financing of a major renovation?

Growing families are often eager to stay in a particular neighborhood but get frustrated with a short supply of larger, move-in-ready homes. A Major Renovation Loan may be the answer.

A Great Midwest Major Renovation Loan often uses the same product format as a New Construction Loan. Depending on your existing equity position and cash available for a down payment, we may be able to “roll in” the amount of an existing mortgage or, more simply, offer a smaller, second mortgage specifically for construction costs.  

In most cases for renovations of $100,000 or more, the former is necessary using an adjustable-rate mortgage product.  At closing, as is the case with most home construction loans, the original mortgage is often refinanced into a longer-term fixed-rate mortgage.

[Guide to Financing Your Home Renovations]

For more resources for understanding Home Construction Loans and other home lending options, contact one of our expert loan officers or stop into one of our convenient locations today.