Construction only loans. These loans are short-term loans that last for a year or so. They usually have adjustable rates that rise or fall with the prime rate. At the end of the term, you must pay off the entire loan. This means refinancing into a more conventional loan that can be for up to 30 years. [1] X Research source Construction-to-permanent loans. This is an all-in-one option that you can use to buy land and complete your home. You then work with the lender to transition to a permanent loan after construction is completed. [2] X Research source
The application process is easier for an all-in-one construction-to-permanent loan. You apply only once. By contrast, you’ll need to apply twice to get a construction loan and then another permanent loan to pay off the construction loan. You’ll save several thousand dollars in closing costs with a construction-to-permanent loan. [3] X Research source However, your interest rate might be higher with an all-in-one loan. By the time you finish construction, interest rates could have fallen dramatically. Unfortunately, you could be locked into a higher rate with your construction-to-permanent loan. Generally, you also have fewer options with an all-in-one loan. If you get a construction-only loan, then you can find a permanent loan from any lender you choose, which might provide more options as the least expensive permanent lender may not offer construction loans.
A qualified builder. This person is typically a licensed general contractor with a solid reputation for building homes. By hiring a qualified builder, you show the lender that the loan is a good risk. [4] X Research source You can find a builder by contacting your local chapter of the National Association of Home Builders. [5] X Research source Specifications. Lenders will want you to provide floor plans and information on the materials used. Down payment. Lenders will prefer 20-25% as a down payment. Appraisal. You need to have your specifications appraised. The appraiser will find comparable properties based on the information you provide.
Alternately, you can hire a construction loan broker to shop around for you. This might be a good option if you are too busy. Brokers can get loans at wholesale rates and can often get clients good deals. They can also explain your options to you and answer any questions you might have. You can find a construction loan broker by getting a referral from your local Chamber of Commerce or by searching online. [6] X Research source
How long have they been doing construction loans? What is the loan-to-cost ratio (LTC) required for construction loans? The range is usually 5-20%. Which is better: a voucher or draw disbursement system? Have the loan officer explain each to you. Does the bank require an interest reserve account? A contingency account? An experienced loan officer should be able to answer these questions easily.
accounts listed that don’t belong to you accounts incorrectly listed as in default or in collections the wrong balance listed the wrong credit limit listed accounts that should have fallen off your credit report
Pre-approval is a much more in-depth analysis of your credit worthiness and finances than pre-qualification.
Talk with your builder about what you want. They can help you come up with a realistic estimate of how long each stage will take.
identity of the parties to the contract, including contact information scope of the builder’s work, such as obtaining permits, furnishing equipment and labor, etc. timing, such as when construction will begin, end, and the schedule of work in between reasons extensions of time may be granted payment: when, where, and how how plans can be changed warranties to fix defects in the home and what the builder will do to fix them how you will resolve disputes, such as mediation or arbitration signatures of the borrower and builder
Builder’s risk insurance. This insurance covers your home while under construction, and protects against vandalism or theft of tools, equipment, and materials. Policies generally last nine months to a year and can be renewed. If your builder has this insurance, then get a copy of their certificate of insurance. Liability coverage. Someone might get injured during construction, in which case you’ll want coverage. Ask your builder if they have general liability coverage. You should also have a homeowner’s policy. Generally, most people get $300,000 of liability coverage through their homeowner’s policy.
copy of the deed to the land ALTA Settlement Statement (if necessary) contract for the land if you aren’t yet the owner construction contract builder information (name, contact information, and federal tax ID number) plans and specifications for the home certificate of liability insurance for the builder builder’s risk/homeowner’s policy building permit if builder wants disbursement at closing
After you submit your loan, the lender should provide you with disclosures that will guide you through the loan process.
You should review this schedule carefully. It should also explain what documentation you need to submit to the lender in order to get a disbursement. [16] X Research source
One thing you might not understand is the “interest reserve. ” Generally, you will not make payments on the loan while your home is being built. Instead, you will make an interest payment on the funds disbursed. [17] X Research source This money will come out of the interest reserve, which is a sum of money set aside for these payments. [18] X Research source Construction loans also add contingency funds in case of cost overruns. Usually, the bank adds 5-10% of the loan balance. If you don’t use these funds, they won’t be added to your mortgage.
If rates are trending upwards, you should consider locking. Before locking, check whether you will be charged a fee, which will reduce the amount you will save by locking in. However, if rates are moving down, you should consider letting the interest rate float.
With a construction-to-permanent loan, however, you have only one closing. [19] X Research source
certificate of occupancy from the builder final title update from a title insurance company 100% complete inspection report completion and acceptance letter signed by the builder and you final lien waiver or affidavit signed by your builder homeowner’s insurance policy with the first year’s premium already paid
