Construction Permanent Loan Needed or Not

Construction Permanent Loan Needed or Not?

The story normally goes as follows… A buyer is looking to purchase a lot and build a new custom home.  They start by contacting a local, trusted builder to obtain a good idea of what the process involves and the costs involved.   The builder will engage in this process with the prospective client to see how they can meet the needs and requests of the client.  They discuss design, scope, timelines, costs, permitting, desires, and so on. Eventually the conversation can lead to the prospective client asking themselves,

“Can I afford this project out of pocket with my own savings or will I need to obtain a loan?”

Construction Permanent Loan Needed or Not?

A construction loan is a short-term financing vehicle used to fund the construction of a new home project.  When a buyer realizes the need to secure a construction loan, they start speaking with lenders who provide construction financing to fund the costs that will be incurred during the building stage.   Using a lender that has vast experience in construction lending can help you avoid potential headaches along the process.   

Here are some basic questions and answers that normally come up between the buyer and the lender:

Question: I have a lot purchase contract; how does that work with the construction contract I obtain from my builder?

A. These two contracts are combined into one acquisition cost to help establish the total cost for the project and down payment needed to acquire financing.  

Question: Will I have to do another loan when the new home is completed?

A. The One Time Close construction loan has become more popular over the last several years due to the fact that a customer will close only one time on the construction loan saving money and time.  This loan closing takes place upfront before the construction work begins.

Question: What are draw requests?  Is the builder paid directly from the lender?

A. Draw requests are disbursements made most commonly directly to the builder for work that has been completed.  This can cover such aspects as foundation draw, framing draw, roofing draw, flooring draw, etc…

Question: How many months will I be given to build this new home?

A. Generally up to 12 months is given as a period of time to complete the construction of a new home.

A few additional questions that generally come up in a discussion about the custom home build process:

  • How is the deposit I have to give to the builder applied to my construction loan?
  • What are the estimated down payment and closing costs to do a construction loan?
  • What penalties will I incur if the builder does not finish within the time constraints of the loan?
  • What happens to my construction loan when the Occupancy Permit is received by my builder?
  • Should I work with an Architect before I get serious with a builder?

Working with a lender who understands the construction to permanent loan process is very important.  This relationship will allow you to establish a firm yet comfortable budget that does not stretch your income to a place where you do not have the ability to repay the loan.  

This has been a guest post contributed by Scott Shelton of Academy Mortgage Corporation:

[author] [author_image timthumb=’on’][/author_image] [author_info]Over my 22 years of mortgage banking I have helped many families achieve the dream of home-ownership. Whether you want to buy a new home or refinance your existing mortgage, I will provide a customized solution for you at competitive rates. No hassle and no surprises. For any questions you may have on construction financing please do not hesitate to give me a call, my direct line is 703-880-1841.
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