For those building a brand new home from the ground up, a construction loan is needed. A construction loan will include funds for both materials and labor but can also include funds for the lot of the borrowers don’t yet own the lot where the property will be located. When preparing to apply for a construction loan, you’ll need to have your plans and specifications ready. These plans will list the materials and provide an approximate amount of the cost of construction.
Funds for construction are provided to the builder in phases and not issued in one lump sum. For the first draw it might be to clear and prep the lot. The second might be to begin framing for the foundation and so on until the home is ultimately completed. During this time, the lender will send out an inspector who will verify the funded stage has been completed and ready for the next round.
The lender will also order an appraisal noting what the value will be “as completed” even though the home has yet to be started or in construction phase. It’s this value where the lender establishes a minimum base loan amount. Depending upon the size of the job, a home can be built in as little as six months to a year or more. But once construction has been completed, the construction loan needs to be replaced. This replacement is referred to as the “permanent” mortgage and is nothing more than your traditional home loan.
Your construction lender will want to see that you’ve already applied for a permanent mortgage and received a preapproval. To do this, you will need to provide your preapproval letter from your mortgage company.
The permanent mortgage can be any available residential home loan. You will be expected to provide documentation verifying your income, employment and assets. Your credit report will also be pulled as well as credit scores. Upon the initial application, the lender can provide you with your preapproval letter. Yet as construction progresses and you’re getting closer to completion, the lender will ask for updated credit documents, even though you’ve already provided them. This is due to the requirement that all credit documents, things such as your paycheck stubs, bank statements and credit report needs to be no more than 30 days old. When the lender is alerted that completion is nearing, the lender will need new documents from you.
Finally, there are loans sometimes referred to as “one time close” or “construct to perm” that combine funds for both the construction as well as a permanent mortgage. To find out which scenario is best for your situation, your loan officer can help find the financing for you.