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I am thinking about building a house on a piece of land that is for sale.

If I was to get a loan in the amount of $ 200k, would the funds be released to me in total? If they are not released in total, are there building benchmarks that must be met?

How does it work?
Do all lenders issue new construction loans with “draws?” I like the idea of the draw because it will keep the contractor on task.

5 Thoughts on New Home Construction Loan?
  1. Reply
    February 4, 2014 at 4:07 pm

    The best program is probably a one time close construction permanent loan. That way you only have one set of loan fees.

    The appraisal is completed using the plans and specs and based upon the property’s value upon completion.

    The first disbursement pays off the land. You must use a General Contractor who must go through the lender’s approval process or be on the lender’s list of approved builders. He may elect to sub some of the work back to you if you will be doing some of the work. Lenders do not do “owner/builder”

    Your builder will prepare a construction schedule and the lender will disburse draws based upon either percentage of completion or line item, depending on their process.

    There are several lenders who offer these products and their programs will vary a bit from lender to lender. Some close “up front” allowing you to lock in today’s rate and some allow you to lock upfront or float to close of the construction loan and then lock or to lock at some point during construction and then do a one time float down to a lower rate if available prior to modifying the loan to the permanent loan.

    If you’re in Portland, OR check out First Horizon Home Loans, Homestreet Bank, and Washington Mutual. They all offer this program. The one you choose will be decided by the options you want.

  2. Reply
    February 4, 2014 at 4:27 pm

    The money is dispersed on a draw: Usually the builder has to submit some project plan with time-lines attached. As steps are completed, the money is dispersed (to the builder) by the mortgage company. When the house is done, your construction loan will either roll into a perm loan (one closing) or you’ll refi into a perm loan (two closings). Different companies have different loan packages.

  3. Reply
    February 4, 2014 at 4:27 pm

    A lender may provide a straight land loan to you, which would go to the seller as part of the purchase price, with the balance of the purchase price coming from your cash injection. Thereafter, you might take out the land loan with a construction loan – the initial draw on the construction loan would pay off the land loan, and the rest of the loan would finance construction and finance costs. Alternatively, a lender could provide you with a single close loan, which would fund both the acquisition and the construction. Upon completion, the construction loan would be paid off with permanent financing, i.e., a regular home loan.

    On a construction loan, generally the funds are not released directly to you. As work is completed (e.g., foundation poured, framing erected, plumbing installed), the general contractor will provide documentation to the lender in the form of invoices from sub-contractors, and a site inspector will go out to verify the completed work. Once verified, funds are released to pay off the subs for work completed. If the amount requested is outside the construction budget, there may be a cut-back in the loan draw. If, for example, there was $ 10,000 in the budget for windows, and a $ 12,000 loan draw request was submitted because more expensive windows were installed than were originally in the loan budget, then the draw amount would be reduced to $ 10,000 and the difference would have to be paid by the home-owner. Larger developers generally work within a given construction budget and funds are released on a percentage completion basis. You always want to have a sufficient contingency reserve because nothing ever goes exactly according to plan.

    I’d recommend doing some background research to see what you’re getting into. There may be entitlement issues (like zoning or easements), you want to make sure you’ve got access to roads & utilities, and you want to get a really good general contractor for the construction. Look into the different types of contracts (fixed price, cost-plus, etc.) to make sure you understand what happens in the case of a cost overrun.

    Building your own home can be rewarding, but you really don’t want to start educating yourself about the process half-way through. Good luck.

  4. Reply
    February 4, 2014 at 5:15 pm

    Construction loans are story loans which means the lender has to know the story behind the planned construction before they’re willing to loan you money (usually plans provided by an architect/ builder).

    They usually require interest-only payments during construction and become due upon completion (house has its certificate of occupancy). The contractor and the lender establish a draw schedule based on stages of construction (may give a $ 20k first draw, then once frame & drywall is complete a $ 50K draw, etc until all money is disbursed) and interest is charged on the amount of money disbursed to date.

    Something else to consider with a construction loans is how much of the project cost the lender is willing to lend. But if you already own the land, that can be used as equity on the construction loan.

    I would suggest looking into a construction-to-permanent financing program where the construction loan is converted to a mortgage loan after the certificate of occupancy is issued (only one application and one closing).

    A construction loan isn’t meant to be around for a long time. If you’re taking out a $ 200,000 construction loan for six months and you pay an extra 5% on the loan, it costs you an additional $ 250. You may be willing to pay a higher rate if you’re doing construction-to-permanent financing and can get better mortgage terms or a longer, better rate lock from that lender.

    Hope this helps! 🙂

  5. Reply
    stephen l
    February 4, 2014 at 5:48 pm

    They will have draws. I recommend First National Banc Corp. They do business in most states and are your best opportunity for someone to say yes. ADDITIONALLY, IF YOUR CREDIT IS SUSPECT, THEY SOMETIMES FRONT THE MONEY TO GET YOU INTO A CREDIT RESTORATION PROGRAM SO THAT YOU CAN QUALIFY FOR A LOAN. Check out the free evaluation form at the source website and a First National loan officer will contact you within 24 hours. Good luck.

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