When you need a vacation home and you want to build it yourself, getting a mortgage for that property can be very murky. Most major lenders don’t deal with these loans as typical mortgages, or often even typical construction mortgages, because they simply don’t understand them. Because these loans don’t fall into one neat category of loan type, lenders often won’t take the time and trouble to understand them and therefore, they simply won’t offer them.
A recreational construction loan can be taken out as a second mortgage on your own home. You can use this cash to use as a down payment on a typical construction loan, and the process would occur much the same as if you were taking out any other second mortgage. You might need to take out more than you normally would on your second mortgage, as you’ll probably also need construction financing to pay for the building of your recreational property. But even this second mortgage can become a bit confusing, as you’ll have different options.
The most traditional form of second mortgage is a home equity loan. These work much like your first mortgage wherein you’ll receive a lump sum payment and pay it back over a specified period of time. Another type of second mortgage you can use for construction financing is a HELOC, which will give you interest-only payments and let you pull from it whenever you need extra cash. This can be beneficial as you’ll need different amounts of money during different phases of construction. With construction financing these are called draws, and there is another type of loan you can apply for that focuses on them.
That is a standard construction loan. These loans have draws set up; and these draws are so that you can make payments to the contractor as they complete the work. Once the recreational property is completely constructed, the construction loan can be turned into a regular mortgage – something that will have to be applied for anyway, so that the person can not only pay for the construction, but also the actual home.
Construction financing for recreational properties can be very difficult to obtain – especially if you go to a major lender. Going to a broker though will open the door to second and third-tier lenders, as well as private lenders. These lenders not only sometimes understand recreational construction loans a bit better (because they deal with them more often) but you’ll also have better chances of being approved for a loan.
