We can make the building process easy with a residential construction loan. This type of loan is a short term multi-advance closed draw note. What does this mean? It means you can draw on it up to the amount approved but is not a “revolving note” like a Home Equity Line of Credit. This type of loan can be structured for a ground up home project or a major remodel of an existing home. Construction loans are “interest only” loans meaning payments made during the project life are not principal and interest like a typical mortgage loan, but interest only payments during the term. The amount of the payment is calculated by the outstanding balance on the loan each month. These payments start out low, due to little to no balance on the loan in the beginning, and rise as funds are invested into the home.
The loan is structured to fund costs associated with the project. Costs include the land where the home is being constructed and your build contract with the General Contractor. The loan amount is determined by the total cost of the home project and the amount of funds a borrower has available to contribute to the home. As an example, if a person owns the land free of debt and it’s the equivalent of 20% of the total home project the construction loan amount would be 80% of the entire project costs. If funds or land equity is less than 20% the construction loan provided would be increased to bridge the difference.
Once the loan is in place and construction begins your contractor will request funds to pay for materials and labor periodically throughout the build. Prior to providing those funds your lender should inspect the home site to determine sufficient improvements are in place to release the funds. In addition, your lender should contact a title company with each funding request to assure no changes in the chain of title have occurred on your property. This process continues until your home is completed at which time you’re ready to move to permanent or long term mortgage financing, which would pay off your construction loan.
Now it’s time to move in and enjoy your new home!