Borrowing Money to Build a New Home – Step 2
July 25, 2018 |
In step one, you learned how to get your fixed-rate mortgage. In step two I’m going to talk to you about getting the actual construction loan.
How a construction loan works: A construction loan is basically a line of credit, from which you take draws at specifically defined intervals during construction. For example, at Sanctuary Homes, we request a draw when the house is dried in, when mechanical rough-ins are all complete when the cabinets are set, and upon substantial completion. You only pay interest on the amount of money you have drawn, not the entire amount of the loan. Unless, of course, you are at the end of the project, and have pulled all the money. Honestly, if you are communicating to your lender and your lender is doing his/her job correctly, you should only have an entirely drawn construction loan for 15 days or so.
You may already own the land where you plan to build your new home, or you may have identified a place you would like to buy. In the first instance, if you already owe money against the lot, when you close on your construction loan, the first draw will be to pay off that loan. Your bank which extends a construction loan to you will want to be in the first position. In the second instance, typically when you close on the purchase of the lot, you will close simultaneously on the construction loan. I’ve found this saves money by not duplicating closing costs and saves time for you.
When you apply for the construction loan, the banker is going to want the same items you supplied to the mortgage lender:
– most recent two years tax returns and W2 forms
– one month of current pay stubs
– three months bank statements for any account that holds the money you plan to use toward the costs of your new home
– most recent retirement statement
– know the payment and balance owed on any mortgages, autos, student loans, credit cards, etc.
Plus the following:
– a final set of plans in PDF form (emailed)
– the specs from your builder. (Note: Our specs, which are part of your contract, are often 30 pages long. Your bank does NOT want that much information, and neither does the appraiser. At Sanctuary Homes, we have condensed the data that will affect the appraisal down into a 3 page.PDF document the bank can easily share with the appraiser. It’s a big hit.)
– the contract with the builder
– the pre-approval letter from your mortgage lender
I’m not sure why, possibly because the appraisers seem to be backed up, but this step takes 3 – 4 weeks. I find it maddening.
Once your paperwork is in order, and the appraisal report is in, your banker will take all of it to a committee meeting to obtain approval. Once approval has been granted, the closing happens reasonably fast. Usually within 7 – 10 business days.
I hope you found this information helpful! ~Starr