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FINANCING MY DREAM HOME
Refinance your home and take advantage of great rates!
1. Are there any other costs associated with the construction of my home?
2. You mentioned the term "fixed price" contract. If I contract for work to be done, doesn't it automatically mean that everything is covered?
3. When will I have to make loan payments?
4. Will the payments on my construction loan include principal and interest?
5. My friends obtained a single-close loan and they said that's what I should get. What is a single-close loan?
6. What will my construction lender need in order to review my loan request?
7. Does the construction lender really need all this information? Why do I need information on the builder?
8. Does that mean the construction lender will take responsibility for watching the job for me?
9. How will I get money from the construction lender? Is it given to me at the time I sign the loan documents?
10. Is there a way to use the equity in my existing home as down payment on my dream home?
11. What if I get the construction started and decide to change something in the plans and specifications?
12. Can I start construction on the house from my own funds and credit cards and then go to a construction lender if I run out of money?
13. What do you mean when you say "break ground"?
14. "Broken priority?" What does that mean?
15. What is a closing agent?
16. You mentioned financial planners and insurance agents as part of the construction team. What role do they play?
Requesting Funds From My Construction Loan
Are there any other costs associated with the construction of my home?
A fixed price contract should take into consideration all materials and labor. You should read it thoroughly to be certain you know what's covered and what's not. The contract price may only include on-site costs construction materials and labor) for a project. Off-site costs (the paper that leads to the construction) should also be taken into account. These include the architect's
fees, engineering fees, soils reports, city or county permits and fees, and builder overhead/supervision.In addition to the contract price, it is common for a construction lender to build a contingency reserve into the loan. This is a specified percentage or dollar amount usually required by the lender in case of unforeseen circumstances that could negatively impact the construction of the home. The amount required is usually based on a percentage of the contract price, on-site costs or loan amount. You should ask your lender about its policy regarding funds that remain unused after the construction of the home.
Additional costs include any construction loan closing costs and fees and special insurance requirements. These will vary based on loan amount, construction term, etc. But don't worry, our unique Construction-to-Permanent
Loan includes on-site costs, off-site costs, closing costs, interest reserve, contingency reserve and lot purchase or value.
You mentioned the term "fixed price" contract. If I contract for work to be done, doesn't it automatically mean that everything is covered?
No. Some contracts are referred to as "cost plus" because they guarantee the price only for the contractor's supervision of the job and may exclude a portion of the costs for materials and labor. Other contractors may cover both labor and materials but include a clause that permits the contractor to charge more if there are material shortages or increases in costs. You will want to clearly define what is and is not covered.When will I have to make loan payments?
Depending on your construction lender, you may not have to make any payments out of pocket during the construction period at all. Your lender may incorporate an interest reserve within the loan amount. Depending on how quickly you use your construction funds, there may be sufficient funds within the construction loan to carry
you through (or almost through) the entire construction period. Our Construction-to-Permanent Loan program includes an interest reserve in the loan. Of course, if you use the money faster than expected, you will have to make some payments from your own funds outside the loan during the construction period.Will the payments on my construction loan include principal and interest?
Not necessarily! Your construction lender may allow payments of interest only until the house is completed. Generally speaking, interest is charged only on the amount of funds used. You will want to verify this with your construction lender. Interest on our Construction-to-Permanent Loan is charged based on the funds used.
Payments are interest-only during the construction period, converting to principal and interest payments upon completion of the home.My friends obtained a single-close loan and they said that's what I should get. What is a single-close loan?
A single-close loan is a loan that encompasses both the construction period and the permanent loan. Until a few years ago, if you wanted to build a new home, you had to obtain two loans: an interim construction loan to get the house built and a long-term traditional mortgage loan afterwards to pay off the construction loan. When there are two separate loans, often with two separate lenders, it is necessary for the borrower to qualify twice: once before the construction loan and again before the long-term loan. Additionally, there are two sets of documents and two sets of closing costs.We offer a single-close loan, called a Construction-to-Permanent Loan, with a 6-, 9- or 12-month construction period and a 15- or 30-year fully amortizing permanent phase. We also offer rate protection during both phases of the loan and a rate improvement option.
What will my construction lender need in order to review my loan request?
Remember, you're asking the lender to loan you money on your dream. Your lender will need to see your dream as clearly as you do. Therefore, in addition to standard credit documentation, your lender will want, at a minimum, copies of the following to start the process:1. Final plans and specifications. These are needed in order to obtain an appraisal.
2. Purchase contract for the lot (or Settlement Statement if you've already purchased it)
3. Property Profile (Description of Materials)
4. Line Item Cost Breakdown
5. Builder's construction contract
6. Copy of builder's license
7.Builder's statement or applicationKeep in mind that you need to obtain the necessary building permit for your community. We've included a helpful Borrower's Checklist on pages 22-23 for your use in meeting our Construction-to-Permanent Loan requirements.
Does the construction lender really need all this information? Why do they need information on the builder?
Yes, the construction lender really does need all this information, and sometimes more. Because they're a key player on your team, as well as an investor in your dream, they will want to do their own research on the project.Does that mean the construction lender will take responsibility for watching the job for me?
No, the construction lender does not assume that responsibility. You will need to monitor the construction of your home and make sure it is completed to your satisfaction. If you have selected a reliable builder, your job will be a lot easier.How will I get money from the construction lender? Is it given to me at the time I sign the loan documents?
Generally, a construction lender will not advance funds for the construction of the home until certain key events occur. Usually, some work must be completed before the lender will advance any funds. Therefore, you or your builder may have to pay for some materials and labor up front to get the construction started before you will be able to obtain any funds for reimbursement from the lender. Some lenders may require copies of paid receipts, lien releases (also known as lien waivers) and site inspections.Others may base disbursement of funds on work completed as evidenced by site inspections and title company endorsements, assuring them that the property does not have any mechanic's liens filed against it. Still others may offer a joint check system which permits the borrower to issue checks but requires the lender's co-signature prior to payment. Be sure to ask your lender how they disburse funds on a construction loan. Our Construction to-
Permanent Loan disburses funds for material and labor costs based on work completed and supported by site inspections and title company endorsements. Reimbursement for permits, architect's fee and other off-site costs in excess of your equity requirement is based on paid receipts and/or canceled checks. This process is explained in greater detail on pages 17-19.Is there a way to use the equity in my existing home as down payment on my dream home?
Yes! You may obtain a Bridge Loan or Equity Line and use the equity in your home as the down payment on our Construction-to-Permanent Loan. And during construction, there are no monthly mortgage payments on the Bridge Loan. This lets you live in your existing home while you're building your dream home. Your Bridge Loan is not due
until your new home is finished or you sell your existing home.What if I get the construction started and decide to change something in the plans or specifications?
Since your loan, permits and construction contract are all based on the plans and specifications submitted in your loan package, you will need to obtain approval for any changes with your architect, lender, the city and/or county planning department and the builder. Depending on the extent of the changes, if approved by all parties, you may be required to make security deposits and/or pay additional funds before continuing with construction.Can I start construction on the house from my own funds and credit cards and then go to a construction lender if I run out of money?
Unless you're certain that you can build your home totally from your own cash reserves, it is generally not advisable to start construction on your own. If you do start and run out of money, you may have difficulty in getting a construction loan. Several reasons (though not all) are as follows: First of all, your contractor may have difficulty in
getting materials delivered on anything other than on a cash basis, as material suppliers are unable to verify funds through a construction loan. He or she may have similar problems with subcontractors wanting advance payment for work that would otherwise be billed in increments or at the end of their work.If you do find that you need a construction loan, normally your construction lender would require that the collateral for the loan be a first mortgage, insured by the title company to be lien-free. This means that if work has already started, the title company may not be willing to insure the loan in a lien-free condition. If the title company does agree to insure title, it may first require copies of your construction loan package including, but not limited to, your personal financial statements, plans, cost breakdown, contract, information on the contractor, and lien releases. Upon review and approval, the title company will generally require that you and your contractor indemnify them against any mechanic's liens.
In addition, your construction lender may be reluctant to place a loan against your property without having had the opportunity to inspect it during the earlier stages of construction (to be certain those items that are no longer visible meet the specifications of the plans).
This is for the lender's protection and does not take the place of any city, county or state building inspection requirements.
Furthermore, if you use all of your funds to build your house, you may not have the reserves required by your construction lender to qualify for a loan should you discover you need one.
Finally, if you have used your credit cards to pay for construction, most construction lenders do not provide for the payment of credit card debt through a construction loan. Consequently, you could be stuck with credit card debt at a higher rate of non tax-deductible interest than your construction loan would have provided. Generally, it is much safer not to start construction (or "break ground") or even drop materials on the lot until the construction loan has been funded through your closing agent.
What do you mean when you say "break ground?"
This is a common construction term that refers to the start of construction. Think of a shovel touching the dirt to prepare the land for construction. This may include even simple tasks such as clearing shrubs, weeds, trees, or dropping soil on the site. Any such work constitutes "breaking ground". Any work started prior to the recording of the construction loan constitutes what is called "broken priority" and may create obstacles or delays in the loan closing."Broken priority?" What does that mean?
This is another industry term. It refers to starting construction or breaking ground prior to obtaining construction financing. Again, remember that most individuals get their construction loans recorded first and then start construction.What is a closing agent?
Depending on your geographic location, your closing agent may be an attorney, a title company or an escrow company. This is the person (or entity) who assists you in signing loan documents, recording or filing deed transfers and mortgages, ordering title insurance and coordinating the exchange of funds.Since there are differences in how a construction loan is documented and closed, you should select a closing agent with experience in construction loan closings. The agent's experience and expertise can simplify the process.
You mentioned financial planners and insurance agents as part of the construction team. What role do they play?
A financial planner or tax accountant may be able to offer you adice on any tax benefits available. This may include suggestions on when to build and whether or not you should sell your current residence. It may also include
information on where to build and what materials may offer you tax advantages.Likewise, an insurance agent may provide you with information about any insurance benefits available for utilizing certain materials, as well as geographic considerations. In addition, the insurance agent can start shopping rates to obtain those special insurance coverages that your construction lender will require, such as course of construction
(builder's risk) insurance, personal liability coverage and general liability coverage.I never realized there were so many considerations and people involved in building a home!
Yes, there are a number of considerations, but you have the advantage of being able to select experts for your team. Consequently, you can build the home that not only fits your needs and other practical requirements, but also meets your aesthetic and visual expectations – your dream home!
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