While purchasing a used home or cookie cutter home from a real estate developer is fine for many people, others want either a newer home or more unique home. For these people, the best option is to have their own home built from the ground up customized to the homeowner’s liking. To build their own home, many people are forced to rely upon a lender to supply a home construction loan. While getting a traditional mortgage can be somewhat simple, obtaining a home construction loan can be quite difficult, time consuming, and tedious if you do not have the right team of experts by your side to help you. That is the reason we created constructionloan.net, to help you fully understand the process and be as informed as possible prior to proceeding!
The first step in obtaining home construction loans is preparing for your loan application. This process can be more difficult than preparing for a traditional mortgage. To get a home construction loan you will typically need to perform the following steps:
1.) Secure property to build your home on.
2.) Obtain all local land use permits for construction.
3.) Retain an architect to develop architectural plans for your new home.
4.) Hire an attorney to prepare necessary legal documents.
5.) Hire a contractor to complete the construction of your home.
6.) Prepare a construction budget and construction timeline.
Once all permits and plans are obtained, you typically then apply for a home construction loan.
When applying for home construction loans, you should first determine what type of loan you want. Many people who get home construction loans choose standard 15 or 30 year amortizing fixed rate loans, but those could have expensive carrying costs during the construction phase. Other options include adjustable rate mortgages, which offer low initial interest rates, or interest only mortgages which are only available for one or two year terms and must be refinanced after the home construction is complete. When you are applying for the home construction loan, the lender will typically require you to contribute between 15% and 25% of the projected construction costs. The lender will also want you to put at least one years worth of interest into an escrow account which will act as an interest reserve during construction.
Once the loan has been approved, you are now able to start construction. Often, home construction loans are only funded after costs are incurred. So, you will need to have the liquidity to not only put forth a down payment, but also to start the construction process. After costs are incurred, the lender will reimburse you after submitting proof of payment. The invoices you turn in are normally combined into one monthly draw request, which the bank will fund. During the construction phase, home construction loans also require the borrower to repay monthly interest accrued each month.
After the construction of the home is complete, and the home has been granted a certificate of occupancy, the construction loan may need to be replaced. This does not apply to anyone who obtained permanent financing prior to construction. To repay the construction loan, the borrower will need to obtain a refinance on the newly constructed home. This process follows the same steps as anyone seeking to refinance their traditional mortgage.