By CASEY MIDGETT
People are often surprised when they discover there is more than one option when shopping for a new home. The choices are not limited to only existing homes that are for sale. Many financial institutions offer construction loan products that allow families to construct the house that they want and that meets their specific needs or wish list. These loans can apply to homes that will be constructed on land already owned or to be purchased.
Construction loans are typically set for the short term with a maximum of one year. Both fixed and variable rates are typically available. The rates on this type of loan are generally higher than rates on permanent or traditional mortgage loans. Many lenders also offer “Construction to Permanent” loans that allow the loan to transition to a traditional mortgage upon completion.
Getting approved will require some preparation. In addition to common mortgage preapproval documentation requirements such as an application, pay stubs, tax returns and credit reports, the lender will ask for additional documents especially tailored to construction loans. This documentation helps to organize and set the groundwork when approaching a lender about initiating a construction loan.
Things to Consider:
- The Land. If you don’t already own the land, you may need to purchase it first to build an acceptable amount of equity in your future home. Some lenders may allow you to purchase the land through the construction loan process; however they may require a 20 percent to 30 percent down payment on the loan. Depending on the land’s value, already owning the land outright may supply this down payment amount in itself, keeping you from having to bring any money what-so-ever to closing.
- The Plans. Once the land is settled, you’ll need to have home plans designed. An architect, or even the builder, is the best approach to completing this. However, there are many existing plans available that can be purchased and customized to fit your needs.
- Find a Builder. Once you have envisioned and decided what you would like in your house, it’s time to find a builder. It’s important to find a builder that is reputable, fully licensed and bonded. Seeking advice from friends and family, who have had experience with builders, is a good place to start. A quick online search of contractor reviews on websites such as Angie’s List can provide insight, as well. Think of hiring a builder like hiring an employee. Interview multiple builders and don’t be afraid to ask for references or to view any work they have completed in the past.
- What’s Your Budget? Once you’ve found your builder, it’s time to crunch some numbers. Your builder should be able to provide you with a fairly accurate quote of how much your house will cost to build, based on current market conditions. If the costs outweigh your budget, your builder can make adjustments to your plan to bring costs back into place. Be cautious of contractors who won’t give you a final amount or who want to work by the hour, sometimes called “cost plus.” Be sure to have the builder “build in” some allowances for things beyond control, such as delays by weather and raises in material prices.
- Apply to the Lender. Once these steps are complete, you’re ready to apply! Your lender will need the plans, a plat and perhaps a copy of the deed to your land, a cost sheet or budget to build the house, detailed timetables explaining at what points in the build the contractor will require money, and all of the builder’s licenses and registrations. It is essential to obtain builder’s risk insurance from an insurance agency to protect the property against theft or damage during construction.
- Funding the Project. Upon loan approval, the lender will typically advance money, or draws, from the loan only at designated stages throughout the build. This is the lender’s way of protecting the lending institution and protecting you from being overbilled any time during the loan. This will help prevent you from running out of funds before the house is completed. As funds are requested, the lender will usually send someone out to physically inspect the progress.
Think of a construction loan as a giant credit card. You have a preapproved amount you can use or “limit.” Once that amount has been fully used, no more can be drawn off. If the “limit” has been reached before the project is complete, you won’t have enough to finish your house.
- Paying off the Loan. Generally, you’ll pay a construction loan back like you would a credit card, too. During a construction loan, you typically will only get billed for the interest due monthly on whatever money you have actually used of the loan. During the first months of the loan, your payment will be a smaller amount and should increase each month as your house nears completion.Once your house is completed, your lender will pay off the construction loan with a traditional mortgage loan. To do this, the house must be fully completed and move in ready. The lender will most likely need to file some additional documents with your county or local municipality.
There are many details in the process of a home construction, but the end results are satisfying. The reality of creating a home that is exactly what you dreamed is extremely gratifying. Your home will be a place designed perfectly for you and your family to enjoy for years to come.