When Building a New Home - You Need A Construction Loan
How does a Construction Loan Work?
The most favorable option which is called a "Construction / Permanent" or "One Step" loan. This loan combines both the house construction loan and the permanent loan in one package so that you are not paying two sets of loan fees. Not all lenders offer this option so you may have to shop for it. If you will let me know which state you are in I can help you find a lender who offers this program.
Your minimum down payment will be 5% of the sales price of the land and proposed construction costs combined. In addition, the lender will require you have sufficient funds for closing costs and, some lenders may require you have a reserve fund sufficient to cover any overruns or upgrades. This reserve fun does not have to be liquid. It could be your 401K. Some lenders will allow you to finance the estimated 5% reserve requirement if you put down a 10% downpayment.
The loan works like this:
The appraisal is completed using plans and specs to determine completed value.
Your builder or you yourself supplies materials specifications and a construction/draw schedule.
The draws against the loan are paid to you on percentage of completion or on a line item basis. Most lenders make the draw checks jointly payable to you and the builder so that you may maintain some control. You pay interest only payments on the funds as they are disbursed to you and the builder at whatever rate the construction term is set for. At the end of construction the loan converts to a permanent loan. This process will vary a bit from lender to lender. Some convert you at the same rate as your construction, some option a float. There are many different ways of doing the conversion. Talk to your loan officer about your options.
Online lenders offer the best rates available. Many online lenders use a network of banks to create competition. When banks compete, You Win!
Many banks do not advertise a "Construction / Permanent" or "One Step" loan. What they recommend is that you go through a regular mortgage request. Then when an agent is supplied, fill them in on exactly what loan you are interested in.
The Best Online Sources to find your Construction Loan.
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We really like Lending Universe here at Home Building Guide. They do a LOT of Construction Loans. They even have a application setup just for that! On the home page scroll down to the bottom. At the top of the last paragraph you will see a link "construction loan." You can then learn and choose your loan type. Like stated above, the best option for most is the CONSTRUCTION-TO-PERMANENT.
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Lending Tree doesn't have a form for a Construction Loan. Put through your request as a standard house mortgage. An agent from Lending Tree will be assigned to you. Call that individual to get all you Construction Home Options.
Lending Tree will pay you $500 if they don't get you the best rate.