Construction loans come in several varieties, but generally, they are interest-only loans that last for the time it takes to build the home. If you’ve never had to obtain a construction loan before, or if your bank doesn’t have one, contact us, we’ll be happy to describe the process and put you in touch with a loan officer at a local bank who can walk you through the steps.
Because you may have never built a home before, let’s describe how it works.
First, you qualify for a loan, like you would for any mortgage product. They will ask for all the usual things to qualify you—no surprises there. If you use your own lender, then generally the builder will also have to be vetted, so that’s another process. You can bypass this step by using the builder’s lender. Once buyer and builder are vetted, the loan is approved up to a certain amount. Because this is a loan for a home that is not built yet, the lender will not issue the entire amount to the buyer (and that’s good for you: you don’t want to pay interest on the whole amount for the duration of the build). But because there aren’t even plans for this home yet, the approval is contingent on a preliminary appraisal that occurs just after the design phase is complete. We send the bank the design we complete with our clients at the same time we send it to our engineer for his review. Once the bank agrees that we can build the house for what we are charging you, they approve the loan.
The loan is structured into “draws,” which are milestones after which the builder may be paid. Unless you first bought your land with a conventional loan, or cash, your first draw typically is for land and doesn’t involve the builder. The draw structure can vary, and include the following milestones:
Once the construction draws are all taken, the loan then is wrapped into a conventional mortgage product of your choosing. From there, you’re on the usual mortgage treadmill.