What are construction mortgage loans?
You’ve searched everywhere and can’t find a place you want to call home. So you decide that you might just have the perfect home built for you on a property you’ve found or already own. When it’s time to finance the project, you can’t just get a traditional mortgage. Instead, you need to get what are known as construction loans. The steps to obtain these funds are a little more difficult than a traditional mortgage.
Get Construction Loans
When you buy a house, you put down some money and the bank uses the property as collateral for the note. However, if you are raising funds to build a home, there is no building for your lender to use as collateral. To get one of these loans, you will need to have some type of banking history. There are also special guidelines, which vary from lender to lender, that govern how these funds are released.
In one of the first steps in obtaining the funds to build your own home, you will need to present the “story” of the project. This is simply a set of detailed plans and a realistic budget that the lender can see. There should also be a schedule that shows how long it will take to build the residence and plan the distribution of the payment.
If the application is approved, you will not receive a check for the full amount. Instead, you will be assigned what is known as a bank draft. The draw schedule for the draft will follow the outline of the project schedule. A representative from the lender will also closely monitor the property to make sure the home is being built as planned. The lender must approve the withdrawal of funds from the draft verifying that progress has reached the point of the next disbursement.
after construction
Typically, the original term of the loan is one year. That doesn’t necessarily mean you have to raise the funds for your new home a year after it’s built. It is simply a reasonable period to build the new property.
When the contractors have signed their lien releases and a certificate of occupancy is issued, the borrower’s liability becomes a traditional mortgage. Typically, the lender combines the construction and mortgage terms into a 30-year mortgage, and you pay closing costs. The good part is, because of the build-to-permanent financing, you’ll only pay your closing costs once instead of twice.
Important information you should know
Construction loans are not common; they constitute a very small part of the percentage of mortgages. Because this type of financing is higher risk than a traditional mortgage, you’ll find that lenders often won’t cover the full cost. They usually only offer up to 80 percent of the total amount. You will need to obtain the additional funds yourself. Some will allow you to use the land you own as capital to raise the funds.
When planning your schedule, you must be realistic. Delays due to material availability and weather are common. Be sure to add extra time to your plans to cover these issues.
If you plan to get construction loans, be sure to talk to your lender about the different options before you apply.