Financing a New Home from the Ground Up

by Daphne Construction in Construction Loan | 0 comments

To help make your dreams happen, a home construction loan is usually needed. But before you dream of building a new house from the ground up, you need to understand more about construction loans. Home construction loans are a little different from most loans. So, we have put together some information and provided it to you in this article to help describe how they work. The most important part before seeking a construction loan, is make sure that your financial matters are in order like you would for any loan. It’s a wise decision to have some preliminary discussions with different lenders so that you can understand your borrowing capacity and be prequalified when the time comes.

Purpose of Construction Loans

As you probably already know, a construction loan is typically used to fund the construction of a new home. Construction loans are obtained by prospective homeowners and are used like a line of credit, which the borrower can use to draw funds in intervals. New homes can be built on an existing lot or land that is already owned by the borrower. If the lot is already owned, the construction loan is only used to fund the labor and materials to build the home. When coordinating both a lot purchase and a construction loan, be sure to have the land securely under contract with a long enough time period for closing or the right to extend the closing date.  This will allow you to have ample amount of time to get the construction loan approved and ready to fund. In addition, just in case you are unable to get an approved construction loan, it is recommended to include as a condition for closing in your lot purchase contract that you must be able to successfully secure a construction loan on acceptable terms. This is suppose allow you the right to terminate the property purchase contract if you are unable to get it financed.

Budgeting for the Construction Loan

The lender will normally ask to see a construction budget that will be evaluated before the funds are approved to build the home. The budget needs to be comprehensive, including all upgrades, appliances, landscaping, and other items that you intend to fund with the construction loan. Be sure that the cost of buying the lot is included in the budget. After the lot is selected and the final set of home plans is chosen, our team at Daphne Construction will assist in developing the budget and draft the construction contract.

Construction Draws

The construction loan funding process is unique when compared to other loan types. A construction loan borrower receives periodic loan advances, commonly called draws, based on predesignated milestones being met in the construction of the home. To plan for these periodic loan advances, the borrower and Daphne Construction will work with the lender up front to establish an approved draw schedule for the work. The loan draws are used to pay for the construction and suppliers. Milestones and methods for scheduling these draws can vary depending on the lender.

To initiate the funding of a draw under your construction loan, Daphne Construction will provide a draw request form and other documents to the lender, including a progress report, mechanics’ lien information. The first draw under a construction loan typically will cover closing costs and the purchase price of your lot. For the other draws, an independent job site inspector will conduct inspections and report the finding back to the lender to confirm the amount of work that has been completed in a manner that meets the job’s specifications. The title company will also review the property records to make sure no mechanics’ liens or other problems have arisen. Once approved, the lender will normally fund the draws directly to Daphne Construction or others that need to be paid. This process seems very troublesome – but it allows the lender to confirm that they are protected and that they are not funding more than the value of the partially-constructed home.

Construction-to-Permanent Loan

Once the home construction is complete, the borrower will need to coordinate a second loan closing for the permanent financing to pay-off the construction loan. While some lenders still offer separate, short-term construction loan products that do not convert, most borrowers choose the convenience of Construction-to-Permanent financing.  The term and rate of the permanent loan can vary, so that is why it was recommended that you speak to different lenders in the beginning.

We hoped that the information provided will help get your dream home started.  If you have any questions, please contact our office at 225-366-2299.