These loans are used to build new homes. This loan is like a line of credit that you can draw off of to pay the builder as the home is built.
There are two parts to a construction loan.
The first part is temporary financing that is 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 the 1st month of building, there will may not have been any draws, so the payment is $0. But then in month 2, let’s say that the builder requires an initial draw to buy materials for $50,000. So there will be an interest payment only on the $50,000.
* One advantage to using me for the construction loan is that we inspect the property every 2 weeks. That way I 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.
3. Once you found a builder and have a budget and plans in place, your next step is to secure financing.
4. Now the process starts. At this point, you are between 4 and 6 weeks from closing on the construction loan. We will order an appraisal that is based on the plans and specs. I will also send all of this information to an underwriter who will underwrite your loan
After Closing on your Construction Loan
1. Once you close on your construction loan, we will set you up an account for you to disburse money from.
2. 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.
3. During the building process you will need to have a builder’s risk insurance policy in place.