If you’re looking to build your dream home from the ground up or renovate an existing property, a construction loan can provide the financing you need. One lender that offers construction loans is Guaranteed Rate. In this comprehensive guide, we’ll explain what a Guaranteed Rate construction loan entails, its types, eligibility requirements, application process, pros and cons, and alternatives.
What is a Guaranteed Rate Construction Loan?
A Guaranteed Rate construction loan is a short-term loan designed to finance the building of a new home or renovations on an existing property. Like other construction loans, a Guaranteed Rate construction loan provides funding in stages as the project progresses. Once construction is complete, the borrower can pay off the loan or refinance into a traditional mortgage.
Guaranteed Rate offers several types of construction loans
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Single-Close Construction Loan: Also called a construction-to-permanent loan, this option combines the construction loan and permanent mortgage into one loan with a single closing. Once construction is finished, the loan automatically converts to a fixed-rate mortgage.
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Two-Close Construction Loan: With this option, the construction loan and permanent mortgage are separate loans with two distinct closing dates. After the home is built, borrowers must qualify and close on the permanent financing.
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FHA 203(k) Renovation Loan: This FHA-insured mortgage covers purchase or refinancing along with home rehabilitation costs up to $35,000. It doesn’t require a 203(k) consultant.
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VA One-Time Close Construction Loan This loan combines features of the VA construction loan and permanent VA home loan into one mortgage for eligible veterans
Guaranteed Rate Construction Loan Eligibility
To qualify for a Guaranteed Rate construction loan, borrowers must meet certain criteria:
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Credit score: Guaranteed Rate requires a minimum credit score of 620 for construction loans. The higher your score, the better your chances of approval and lower interest rate.
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Down payment: You’ll need to put down at least 10% of the total project costs for a conventional construction loan. VA loans allow 100% financing.
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Debt-to-income ratio Your DTI measures your monthly debt payments divided by gross monthly income Guaranteed Rate wants to see a DTI of 43% or lower,
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Cash reserves: Expect to have at least 12 months of mortgage payments saved to cover delays or cost overruns.
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Hired contractor: Guaranteed Rate requires you to use a licensed general contractor, not build the home yourself.
Meeting these requirements demonstrates you can afford the loan and project costs. Strong finances lower the lender’s risk.
How Does the Application Process Work?
Applying for a Guaranteed Rate construction loan involves several key steps:
1. Prequalification
Get prequalified to see potential loan amounts and rates. This soft credit check doesn’t affect your scores.
2. Find property and make offer
Once prequalified, you can start property hunting. Make an offer contingent on securing a construction loan.
3. Submit full application and documentation
Now complete the full application and provide income, employment, and asset documentation to verify eligibility. Guaranteed Rate orders the appraisal and title search.
4. Initial loan approval
If approved, Guaranteed Rate issues a loan commitment letter detailing the amount, fees, rates, and other terms.
5. Finalize construction plans/permitting
Work with your contractor to finalize all architectural plans and get the required permits from your local municipality.
6. Loan closing
At closing, you’ll sign the construction loan documents and Guaranteed Rate will disburse the initial draw to start work.
7. Construction and draw disbursements
As certain milestones are met, the lender issues pre-scheduled draws to pay the builder. Inspectors verify progress before each disbursement.
8. Construction completion and mortgage conversion
Once the home is finished, Guaranteed Rate converts the construction loan into a traditional mortgage if you opted for a single-close loan.
Pros and Cons of Guaranteed Rate Construction Loans
Guaranteed Rate construction loans offer several benefits but also some downsides to consider:
Pros
- Offer single- and two-close construction loans
- Allow credit scores as low as 620
- Feature online mortgage process and rate quotes
- Have over 100 branch locations nationwide
Cons
- Require at least 10% down payment on conventional loans
- Have stricter eligibility standards than traditional mortgages
- Carry higher interest rates and fees than standard loans
- Don’t finance DIY or owner-builder projects
As you weigh the pros and cons, think about what loan features are most important to your project.
Construction Loan Alternatives to Consider
In addition to Guaranteed Rate, here are a few other top construction lenders to consider:
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Movement Mortgage – Closes loans in as little as 7 days and offers construction terms up to 12 months.
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loanDepot – Offers VA, FHA, USDA, and conventional construction loans with low down payments.
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New American Funding – Features construction loans tailored for custom homes and major renovations.
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Wintrust Mortgage – Local Chicago lender with construction financing options and in-house inspectors.
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Alliant Credit Union – Member-owned lender with competitive rates and 100% financing on construction loans.
Shopping around and comparing options from multiple lenders can help you find the most affordable financing and best fit for your unique home building plans.
The Bottom Line
Guaranteed Rate construction loans allow you to finance the building or renovating of your ideal home. Just make sure you understand the specific costs, fees, eligibility rules, and risks associated with construction loans before moving forward. Consulting with a loan officer and financial advisor can provide guidance through the process.
With proper planning and budgeting, a Guaranteed Rate construction loan can turn your dream home into a reality. Just be prepared for the extra legwork and administration a construction project entails compared to buying an existing house with traditional mortgage financing.
A potential solution for shrinking inventory
If you’ve been having trouble finding exactly what you’re looking for, or everything you like is being swept away before you can even say, “that’s the one,” you’re not alone. Experts have been cautioning about a lack of available home inventory for some time now, with the onset of the pandemic only serving to exacerbate the situation.
After the typically busy spring market was slightly deferred due to lockdown measures put in place, that pent-up demand drove activity as states opened back up. Enticingly low mortgage rates led to an ultra-competitive market, shrinking the number of homes available. The combination of Baby Boomers waiting to sell and Millennials wanting to buy quickly tightened inventory.
Now that were past that frenzy driven by low rates, the housing inventory remains shockingly low. Recent total housing inventory numbers show only 1.04 million units for sale, which is actually an increase from April 2022 of 1%.
National Association of Realtors® chief economist, Lawrence Yun, continues his recurring call for construction. “The heavy number of new listings is increasing, but they are quickly taken out of the market from heavy buyer competition,” he says. “More homes need to be built.”
USDA Construction Loan Requirements 2024 Full Guide!
FAQ
What is a good credit score for a construction loan?
Why are construction loans hard to get?
What is the lowest down payment for a construction loan?
Why are construction loan rates higher?
Are construction-only loans better than a mortgage?
A construction-only loan offers more flexibility since you can compare lenders to find the best deal on a construction loan and on a mortgage separately. However, you pay for two loan closings. Construction projects are complex, and each one is unique.
What is a construction loan?
There are special financing vehicles, known as construction loans, that can help you get the funds needed to build the home of your dreams. In real estate, a construction loan is a specialized type of loan used to finance building residential property.
What mortgage options does Guaranteed Rate offer?
Guaranteed Rate offers a variety of mortgage options, including FHA, VA, and USDA mortgages, such as FHA and VA renovation loans and FHA’s reverse mortgage, known as a Home Equity Conversion Mortgage (HECM). They also provide mortgage solutions for high-cost properties, including jumbo loans for vacation homes and investment properties.
Are construction loans a good idea?
One notable downside of construction loans is that they usually have higher interest rates than traditional mortgages because lenders see them as high-risk, as no home exists yet to serve as collateral should the borrower default.