The Construction Loan Process
The Construction Loan Process involves everything leading up to the closing and start of construction on your new home. Once you are approved by your lender and your builder is registered, steps need to be taken and documents need to be provided in order to make it to closing.
Drawing Plans and Specifications Are Required
A clear set of architectural drawings with floor plans, showing all dimensions and outside elevations, as well as drawings of the exterior needs to be provided in the final plans and specifications. The contractor will have to provide further details regarding the type of materials which will go into the construction of the home; wood shingle or lightweight tile roofing; brick or stone exterior.
You'll Need an Appraisal Report
The final plans are important to understand the cost of building the home, but it is necessary for the appraisal as well. Just like any other mortgage, lenders need to know the value of your home in order to calculate its Loan-to-Value ratio. But appraising a home that has not been built is a little trickier. That's why professional appraisers need detailed plans and specifications, as well as the total budget for the project to determine its value subject to completion.
The Construction Contract Defines Responsibilities
You and your builder will draw up a Construction Contract. This agreement between both parties outlines the planned construction project, the agreed upon cost of building, and the project's timeframe. The Construction Contract must be fully turnkey, meaning the builder must be responsible for all aspects and the hiring of any and all subcontractors.
Cost Breakdown and Draw Schedule
A cost breakdown needs to be provided by your builder, including all costs going into the construction of your new home, with the total matching that on the Construction Contract. Your lender will usually provide the cost breakdown form to be completed, and have specific guidelines for how draws for the builder are determined and disbursed. Some lenders utilize a line-item percentage of completion method for determining draws while others may use a project percentage of completion method. Typically, funds are disbursed on the basis of work completed.
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December 20, 2022When planning to build a home with a One-time Close construction loan, there are some basic expectations you should have going into the process. For example, you should not assume it is possible to build a home without a down payment. But that's a very obvious issue. What about more complex aspects of building a home on your own lot?
December 15, 2022Government home loan limits are increasing in 2023 and there are indications that the housing market in general may become more favorable to buyers as the new year wears on. No, that won't happen overnight. But the predictions at press time seem to indicate better days are coming.
December 13, 2022The U.S. Chamber of Commerce describes non-bank lenders as a financial institution that lends money but doesn't operate with a full banking license. It does not offer deposit, checking, or savings services. This definition is important, because non-bank entities have become more common in the construction loan space over the years, and now the federal government is stepping up efforts to hold these companies accountable should they run afoul of the law.
