Construction Loans
Are you looking to build your dream own home? We have loan products to help with it! Whether you are buying a piece of land in a development, out in the country, or demolish an existing home our construction program will be a great fit for your project.
Qualifications –
A 10% down payment is required on the land and building costs. If the loan amount is over the loan limit of $548,250 (as of January 2021) a 20% down payment will be required.
A 700 Minimum Credit Score and a 43% debt to income ratio is required
The maximum loan amount is $1,500,000
A Licensed and Insured General Contractor is required.
Builders Risk Insurance is required unless you are not building a new home rather remodeling an existing home.
A 12 Month Initial Construction Period. Extensions are offered if the build takes longer than expected.
Construction Process –
Are you ready to build your dream home, but don’t know where to start?
Here’s a guideline to follow –
First we need to determine which scenario you fit in -
Do you own the land and want to construct a new building or replace an old building?
If you already own the land your construction loan is actually going to be considered a refinance.
We will need to get the builders approval and bids from any sub-contractors (unless they are doing the work themselves) and submit it to an appraiser.
The appraiser is going to determine what the value of the home will be based off a future value approach.
We then will discuss whether a 1-Time Close or a 2-Time Close scenario works better for your situation (See below comparison)
You’ll need to complete any underwriting requirements and then we will be ready to close and get the construction completed!
2. Are you looking to purchase a piece of land and build on it?
First off, we cannot finance land alone. The only we can finance the land is if you start building on it right after closing. A typical scenario for this is that you meet a home builder that’s in a development that already has the plans for the home made. A lot of times you are able to customize these plans to meet your family’s needs as well!
If this is the case we will need to gather the information from the builder and choose either a one or two time close (See below) to complete the loan.
One Time (Modification) Close vs. a Two Time (Refinance) Close
It’s all in the name. During a one time close construction loan you’ll sign the closing disclosure and wrap up the loan before the construction period can commence. You’ll pay the closing costs and the down payment at that point. One the construction loan is 60 days from completion you’ll need to call us so that we can lock you into a long term interest rate. This way once the construction loan is completed we can easily do a loan modification to change your interest rate from the construction rate of 5.95% into a lower rate.
Pros - The really nice thing about a One Time Close is that you only have to pay for closing costs once. The downfall
Cons – Since we close before the construction period starts we can’t go back to get more money if the project becomes more expensive. You would have to find alternative financial measures to pay additional costs.
A Two Time Close is where we will close before construction and another closing once construction is complete. The nice thing about a two time close is that if the project does go over budget we can typically pull out more money for it during the refinance process. You’ll have to get as much of the build done with the money from the first closing first though. A two time close typically comes with a better interest rate as well since we don’t have to lock in 60 days prior to the construction loan being completed, rather a 30 day lock will be in place!
The down fall is that we will be expecting you to pay title and underwriting at the first closing and the second closing, so it is more expensive to complete, but it allows for flexibility.
Construction Loan Term
Along with the regular title, appraisal, and underwriting fees. We will be looking for Draw Fees - We cannot give the contractor a lump sum of money upfront. Rather, we will come up with a timeline and check points for the contractor. Typically there is a 5 check points where at each check point we will hire a title company to release the draw for that check point, so that your contractor has the funds to proceed with the build.
During a one time (modification) close the lender may require a second appraisal to be done at the modification point after the construction is completed.
During the construction phase there will a higher interest rate than usual. The payments will be interest only during this phase. There is no mortgage insurance collected and there is not an escrow account set-up during the construction phase as well. This means that you’ll need to pay any insurance and property taxes on your own.
Have Questions?
Read our other blog posts or reach out to us directly.
Benson Ringle
Loan Officer NMLS #1516626
GA Lic. # 1516626
(218) 507-0429
Benson.Ringle@supremelending.com
