Building A Home? Find A Construction Loan

Here Is How They Work

1.

Lenders will want to know the story behind your planned construction before they approve the loan. This can usually be handled with a simple letter describing what it is you plan to construct and for what purpose.

2.

Construction loans are usually variable rate loans tied to an index such as the prime rate. These loans typically feature interest only payments and the loan comes due upon completion of construction which means when the house receives a "certificate of occupancy".

3.

Many people use "construction to permanent" financing where the construction loan is converted to a mortgage loan when the occupancy certificate is issued. This is the preferred way to finance since it usually requires just one application.

4.

You establish a draw schedule with the contractor and lender based on the various stages of construction and interest is charged only on the amount of money disbursed to date. Money is usually disbursed in stages as the construction progresses.

5.

The loan amount you receive will be a certain loan to value ratio and these differ somewhat by lender. If you already own the land which the house will be built upon, the land would be considered equity for the loan. If you have found a building site but haven't purchased it, the lot and construction loan can be executed at the same time and then rolled into a standard 30 year mortgage when construction is complete.

6.

Obviously, a construction loan is meant to be a short term loan, say six to nine months. If you decide to obtain a "construction to permanent" loan all at the same time, a slightly higher interest rate for the construction loan shouldn't be a concern if you can get better terms, such as being able to lock in a low rate for an extended period for the long term mortgage itself.