Construction Loan Essentials To Build Your New Home

Home construction loans are a specialized field. They differ from any other type of loans or financing. Some lending companies specialize only in construction loans. Lenders of this sort can be found across the country. Finding a lender, however, is not the complicated part of the process. A construction loan, though usually being a wearisome process, can be attained. Though getting a construction loan can be a tedious process, it is a must for new home construction.

When you are building a home to your specifications you need to get a construction loan. A construction loan is not a mortgage. A construction loan can become a mortgage eventually, but when it starts out a construction loan is not a mortgage. A construction loan is financing set up with the bank of your choice that allows you to pay contractors as they build your home. If you already own the land you want to build on then you sometimes do not need a down payment on your construction loan. That depends on the bank. But a construction loan has closing costs just like a mortgage and differing interest rate scenarios just like a mortgage, but a construction loan is an ongoing relationship with your bank that can make or break your dream home.

Construction loans, being story loans, require the lender to know the story behind the planned construction before they will lend the money. Because of this, these loans are not standardized like many loans are underwritten to Fannie Mae or Freddie Mac guidelines. With that being said, there are usually some very common features of these loans. They usually require interest-only payments during the construction process and become due upon completion. Completion usually means that the house has gained its certificate of occupancy.

Getting The Most For Your Money It is fairly common knowledge that a major home remodel that includes the kitchen and bathrooms will be what adds the most value to the home. These two areas are also the most expensive areas to renovate. Upgrading your kitchen could easily cost you up to $75,000 if you go first class all the way. Kitchen cabinets are a very expensive item but will usually give you a good return on your investment. Built in stoves and ovens are also very popular but cost more than the standard stand-alone stove. Counter tops come in all kinds of different materials and colors. Marble and stone are the most durable but also the most expensive

Many home owners run into sub contractors that want payment up front. This should send up a lot of red flags and it should be something you avoid. It is often best to let your general contractor hire the sub contractors and therefore be responsible for paying them. The money you think you save in hiring your own sub contractors can be eaten up in grief, mistakes, and possible fraud if your sub contractor takes your upfront payment and vanishes for good. So be careful and work with your loan officer from your bank, and your general contractor, when it comes to hiring sub contractors.

When your home is finished, and the county you live in has granted you an occupancy permit, then it is time to convert your construction loan into a mortgage. A construction loan is meant to be short term financing and you need to have a plan in mind when it comes to converting to a permanent mortgage. Probably the easiest way to convert to a permanent mortgage is to make sure you get a construction-to-perm loan from the very beginning. This kind of loan allows you to buy the land, finance the construction, and convert to a permanent mortgage all for one closing cost. It is the easy way to reduce the stress on a complicated financial transaction.

Financing The first component of a construction loan is the soft costs. They consist of architectural plans, engineering, and permit fees. They should be taken care of before all else. Second are hard costs. They are all the actual physical costs of construction. Third are closing costs; consisting of lender and origination fees. These also include the title and closing fees. Fourth are inspection fees. These can become very costly, even in simple circumstances. Fifth are reserves; consisting of interest reserve and contingency reserve. Last is the existing lot pay off.

About the Author:

Dont forget that you can download a great construction loan ebook 15 things you should know before you even think about applying for a construction loan.

Related Reading: