How Do I Get a Home Equity Loan if the House Is Not Completed?

Traditional equity loan financing is based on the assumption that a home is fully habitable and not under construction. Lenders verify this information by conducting a full-scale appraisal of the property -- so if you have a home currently under construction, you won't qualify for a conventional home equity loan. However, you might be eligible for what is known as a construction loan. These loans are generally temporary in nature and help you complete your rehabilitation or addition.

TL;DR (Too Long; Didn't Read)

If your home doesn't have any equity yet, you won't be able to get a home equity loan. Instead, you'll need to look for a construction or rehab loan.

Story Loans Explained

When you apply for a construction loan, you are literally "telling a story" to your lender. This means that, before obtaining financing, you must explain when you plan to begin and end your construction, which materials and contractors you intend to employ and how you plan to manage and mitigate unexpected expenses and delays. Therefore, a "story loan" is exactly that: a loan granted to a borrower based on his story's authoritativeness.

Construction loan lenders aren't in the business of making long-term or permanent mortgage loans to their customers. Instead, these lenders are interested in the short-term future of your construction project. If you need to obtain financing from a lender for a home project, first determine the full details of the work to be completed, the budget of the materials and labor, and the timeframe during which you hope to complete the home.

The Right Lenders

As with traditional equity loan financing, construction loan lenders and offers can vary quite dramatically. Local banks and credit unions -- particularly those with whom you already have an established banking relationship -- will likely entertain a construction loan application. These institutions offer competitive rates and programs, but often require thorough documentation verifying the "story" of the construction project. This may include pertinent details, including contractor estimates, building supplies and assessment of assets.

Home Equity Loans

While you can obtain a construction loan to build a new house entirely, you can also get an equity loan on a partially finished home. Both types of loans will likely require you to pay only interest on the loan while the home is under construction, and then mandate a balloon payment of the entire amount financed once construction is complete. At this point, you'll probably have an option to refinance this construction loan into a traditional equity loan or mortgage.

HUD 203(k) Rehab

The U.S. Department of Housing and Urban Development also offers government-sponsored rehabilitation loans for homes that need repair, renovation or rehabilitation. You're eligible for this program if your home is a one- to four-family dwelling or a condominium. If you own a freestanding structure, it must have been at least partially constructed in the last year. Each HUD 203(k) application is reviewed individually by the loan officer managing the application, so speak with your lender before applying for this equity loan.

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