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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September 6, 2023There are many options when you are deciding on a construction loan. Some One-Time Close government-backed mortgages might seem to have identical features compared to their conventional counterparts, but the differences can be important. How much do you know about the features of a conventional One-Time Close mortgage versus the equivalent offered by the FHA?
August 30, 2023When it's time to build your dream home using a One-Time Close construction loan, there is a lot to learn. For example, many first-time home buyers know the house they want to purchase with an FHA mortgage must pass an FHA appraisal. Same for a VA home loan and conventional mortgages. But when a borrower wants to build a home from the ground up and needs to buy a parcel of land to do that, a different kind of appraisal is required.
August 23, 2023Using a One-Time Close construction loan to build a home from the ground up on your own lot can be a great experience. You have more say over the final disposition of your new home than you would if you purchased existing construction, and everything installed in the home will be brand new. But there are some limits to these loans you should know about before applying for the single-close construction loan.
