There are two parts to a construction loan.
The first part is temporary financing that you use during the construction phase of your new home. The other part of a construction loan is converting to permanent financing. This is why you will see lenders calling their construction loan program, Construction/Perm Loans. Here is some basic information that you need to know about construction loans.
* Most Construction Loans are interest only during the 1st year. But you only pay interest on the total amount of Draws. So in your 1st month of building, you may not have any draws, your payment is $0. But then in month 2, let's say that your builder requires an initial draw to buy materials for $50,000. Then you will pay interest only on the $50,000.
* One advantage to using us for your construction loan is that we inspect your property every 2 weeks. That way we have an up to date snapshot of the work that has been completed. So when you request a draw, you don't have to wait until we inspect it for the draw to be released. Most banks require you to request the draw, then they send an inspector out a few days or a week later, then your draw is released to you. Our process is much faster and cuts down on your construction time.
*What if you go over budget? With most lenders this would come out of your pocket. We allow you to build in a 10% incidental amount to ensure that you have plenty of funds.
* Once you are ready to install cabinets in your new home, then it is time to start the process of modifying your loan into the permanent financing. At this time we will need to update your file with current pay stubs and bank statements and a final appraisal. But once that is complete, you should be able to modify that construction loan into permanent financing relatively easy.
Here is an example of how the process should work.
Let's assume that you own a lot and you are ready to build on it.
1. You need to get pre-approved with a lender to ensure that your credit and income meet the parameters to obtain financing.
2. You need to find a builder that you are comfortable with. There are some resources for you to do that. The Madison County Home Builders Association can help.
2. Once you found a builder and have a budget and plans in place, your next step is to secure financing.
3. Go back to the lender that you did the pre-approval with and take them the plans and specs, budget and all of your income documents.
4. Now the process starts. At this point, you are between 2 and 4 weeks from closing on the construction loan. The lender will order an appraisal that is based on the plans and specs. The lender will also send all of this information to an underwriter who will underwrite your credit worthiness, capacity, and the collateral to ensure that you meet the guidelines.
5. Once you close on your construction loan, the lender will set you up an account for you to disburse money from.
6. Now you are ready for the builder to get started. The builder may ask for an initial disbursement to buy materials and pay his workers. After the initial disbursement, the bank will guide you through getting additional disbursements as the work is completed. The bank will inspect the new build to ensure that the build meets the disbursement requirements.
7. During the building process you will need to have a builder's risk insurance policy in place.
If you would like to sit down and talk about a construction loan, Please feel free to contact me.