While purchasing a used home or cookie cutter home from a real estate developer is fine for many people, others want either a newer home or more unique home. For these people, the best option is to have their own home built from the ground up customized to the homeowner’s liking. To build their own home, many people are forced to rely upon a lender to supply a home construction loan. While getting a traditional mortgage can be somewhat simple, obtaining a home construction loan can be quite difficult, time consuming, and tedious if you do not have the right team of experts by your side to help you. That is the reason we created constructionloan.net, to help you fully understand the process and be as informed as possible prior to proceeding!

The first step in obtaining home construction loans is preparing for your loan application. This process can be more difficult than preparing for a traditional mortgage. To get a home construction loan you will typically need to perform the following steps:
1.) Secure property to build your home on.
2.) Obtain all local land use permits for construction.
3.) Retain an architect to develop architectural plans for your new home.
4.) Hire an attorney to prepare necessary legal documents.
5.) Hire a contractor to complete the construction of your home.
6.) Prepare a construction budget and construction timeline.

Once all permits and plans are obtained, you typically then apply for a home construction loan.

When applying for home construction loans, you should first determine what type of loan you want. Many people who get home construction loans choose standard 15 or 30 year amortizing fixed rate loans, but those could have expensive carrying costs during the construction phase. Other options include adjustable rate mortgages, which offer low initial interest rates, or interest only mortgages which are only available for one or two year terms and must be refinanced after the home construction is complete. When you are applying for the home construction loan, the lender will typically require you to contribute between 15% and 25% of the projected construction costs. The lender will also want you to put at least one years worth of interest into an escrow account which will act as an interest reserve during construction.

Once the loan has been approved, you are now able to start construction. Often, home construction loans are only funded after costs are incurred. So, you will need to have the liquidity to not only put forth a down payment, but also to start the construction process. After costs are incurred, the lender will reimburse you after submitting proof of payment. The invoices you turn in are normally combined into one monthly draw request, which the bank will fund. During the construction phase, home construction loans also require the borrower to repay monthly interest accrued each month.

After the construction of the home is complete, and the home has been granted a certificate of occupancy, the construction loan may need to be replaced. This does not apply to anyone who obtained permanent financing prior to construction. To repay the construction loan, the borrower will need to obtain a refinance on the newly constructed home. This process follows the same steps as anyone seeking to refinance their traditional mortgage.

The Department of Housing and Urban Development (HUD) created the FHA 203(k) to fix rehab homes and remodel old ones. They used to have the top construction and rehab loans until major lenders stepped up and offered better loan programs to customers. Now that credit requirements are tighter and loan limits are higher, the FHA 203(k) is getting more of the attention it is accustomed to.

What is FHA 203(k)
This program stands out because it not only allows single family through four unit homes in the program, but condominiums as well.

Although the FHA 203(k) is much like a regular construction loan, there are limitations. The homeowner cannot add amenities to the home. The FHA 203(k) is designed to make a home habitable and affordable.

FHA-Approved Lenders
The Department of Housing and Urban Development does not make loans directly to homebuyers. Instead, it provides insurance to protect lenders in case a mortgage or loan falls through. This process allows lenders to provide more loans to more customers. If the homeowner defaults on a loan or mortgage, HUD will pay the lender. It is actually a good situation for the lender because they will receive their funding regardless.

There are local FHA approved banks and financial institutions who screen applicants for the FHA 203(k) loan. HUD and other programs fund these institutions. When an applicant passes the credit check and the potential home is inspected, the lender provides the funding by which HUD insures.

The applicant has to have the home or property inspected and it has to be approved in order to receive funding.

Limits
As with any loan, this construction loan requires decent credit and a stable income. There are limits to how much mortgage a qualifying applicant can get. Limits are different in each state’s county. One county may be lower than the next. It is important to call your local HUD office to find out what it is in your area.

Qualifying
Established to help low-income families own a home, the Department of Housing and Urban Development partnered with other programs to reach out to the community.

A home that qualifies for the FHA 203(k) construction loan or refinancing is in need of either repair or rehabilitation. The home must also have a foundation. The owner must reside in the home; it cannot be rented out.   The area the home is located in must be in an area acceptable to FHA.

Credit will affect your ability to get a construction loan. For the credit-challenged, this means working hard to clear up bad debt. There are steps to increase your credit score.

Begin with your credit report. It is a good idea to check your credit report every three months. If you cannot afford it, then go to an annual free credit report site and sign up. You can check all three major credit-reporting agencies at the same time. Experian, Equifax, and TransUnion all provide a free yearly report.

Keep in mind that not all three agencies will have the same information. One or two may be outdated, have the wrong personal information, missing creditors, etc. With that being said, know what is on your report and make sure it is corrected.

After doing a bit of housecleaning on your reports, look at your accounts. If something is over two years old, leave it alone unless the creditor is updating it on your credit report. If it is 7-10 years old, leave it alone. Most bad debt has a shelf-life, but some older debts can be sold to collection agencies before they are to come off your credit report. They specialize in buying old debt and recycling them. If the debt is sold to a collection agency, try to deal with the original debtor. Collection agencies tack on heavy fees that they will charge you.

Another thing to check for is revolving accounts. Do not pay off a revolving account and close it. This can be very bad for your credit score. Pay down the balances instead.

Stop buying things, such as a car, that will decrease your credit score. New cars with a fixed term loan will demolish your credit for six months. It is only after that time that your credit score starts going up.

Getting your credit to soar upwards can be a challenge. The best ways to do that is to watch how you use your credit cards. High interest can hurt if you cannot keep up with monthly payments. Making even one late payment can have adverse affects on your credit score.

If you must use a credit card, then watch your spending habits. Use it for emergencies and necessities only. Be aware of credit card companies who penalize consumers for not using their credit cards. As absurd as it may seem, it can happen. Choose a credit card company with a low interest rate and no penalties. Also, watch how many credit cards you get. One or two good credit cards are all you need. It is easier to make monthly payments when you do not have to juggle payments each month.

Build you credit and credit score by paying important bills on time. Everyone from landlords to utility companies check your credit. If you have a history of paying rent or an electric bill late, it will reflect in the loan company’s decision to lend you the money you need. Questions will arise on whether or not you are able to make your payments on time.

One thing that most of us never consider is employees who do credit checks. Banks and any company who deals with customer personal information will do a credit as a part of your application. It may seem bad, but it is to protect the customers.

Getting the construction loan you need will not take long if you work hard at keeping your credit in check. Take time to prioritize your monthly expenses. Get rid of things you do not need and pay on time the things you do.

Set a goal for each thing you need to work on. It could be a high credit card balance or a high interest car loan. Figure out what you can and should pay on your credit report. Clean it up and keep it clean. Only buy what you need and splurge once in awhile.

The biggest payoff will be that brand new home you designed and built.

A draw schedule is an agreement between the homeowner, builder, and lender in regards to when funding is disbursed. A typical draw will release funds for projects as they are finished. There are usually four to six draws in a construction loan, but the total depends on how large the building site is. Each draw calculates into percentages, with everything adding up to 100%. For example, draw # 1 may be for closing costs at 15% completion.

Below is an example of a schedule with five draws, consisting of a short listing of items that can be on it:

Draw #1 (25%) Foundation
Plans and Specifications
Impact Fees
Demolition
Excavation

Draw #2 (20%) Rough Structure
Roofing
Structural Steel
Windows and Exterior Doors

Draw #3 (20%) Exterior /Interior
Interior and Exterior Painting
Drywall

Draw #4 (20%) Trim-out
Cabinets
Electrical

Draw #5 (15%) Closing
Clean House
Place Appliances
Final Inspection
Occupancy Permits

A builder can choose to use his own draw schedule or the draw can be modified. As long as everything on the draw is complete and checked off, the lender will release funds to the builder or contractor.

How to Schedule Draws
The first step in scheduling a draw is to sit down with your lender and discuss everything your home will need in order to be constructed. The most important thing to list is the groundwork. This will include the foundation and cement.

Next, a list of fees, permits, demolition, excavation, and everything else to do with laying the foundation is put down. Without any of this, the beginning stage cannot commence.

The second step is listing requirements for the home’s structure. Brick, plywood, mortar, nails, steel, and roofing material are things included in this draw.

Third, list items required for the exterior and interior part of the structure, such as plumbing material, paint, and drywall.

The fourth draw can include cabinets, doors, insulation, and items needed inside the home. This includes electrical wiring and water heaters.

The last step requires a thorough walk-through inspection to make sure everything is completed, working properly, and undamaged. Projects such as installing appliances and applying floor finishing are completed in this stage. This step will insure that the last draw is released to the builder and contractors.

Not every draw will be the same. It depends on the size of the home and how big or small the job is. Draws are also scheduled according to the type of construction loan the homeowner has.

After each draw is completed and checked off, the builder and contractors are paid. It is in the builder’s best interest to follow through with the construction on time and properly.

Applying for a construction loan can be made difficult when deciding on whether or not to lock in or float your interest rate. There are factors to consider before making a decision.

When you first become approved for a construction loan, your interest rate will most likely be based on what type of loan it is. If you are owner builder, your rate will most likely be high. Lenders usually set a higher interest rate because these construction loans are riskier.

Construction to permanent loans are usually lower because there is a contractor overseeing the building and risks are lower. This is a good time to decide on whether or not you want to keep it for the life of the construction loan or change it. Most banks are willing to lock in the interest rates right away.

Influences in Locking Your Rate
These things will influence whether or not you should lock in your interest rate.

1. The type of loan program you have; construction to perm, jumbo, or owner builder
2. How high or low your interest rate is
3. How many points do you have
4. How long is the lock period
5. Fees to lock in rate

Floating Your Rate
Floating rates are good as long as they are low. A good housing market will influence your interest rate. Some buyers will float their interest rates because they feel future interest rates will drop. This could backfire if rates increase instead.

The best thing to do is go over your interest rate with the lender. Find out about the market. If it is thriving and you already have a low interest rate, consider locking it.

Also get as much information about the type of loan you have. That will influence your interest rate a great deal.

Now that you have the approval of your construction loan, how do you receive it to start building your new home? There are two ways the funds are released to the builder: the Voucher Reimbursement system and the Draw Reimbursement system.

The Voucher Reimbursement System
This old system has been in effect for quite some time. Lenders do not like the system because it involves piles of paperwork to shuffle through. Builders are comfortable with the system and prefer things to stay as they are.

How the Voucher Reimbursement system works:
• The builder is given a large payment book and in order for anyone to be paid, they have to request payment through the voucher
• An inspection needs to be completed before any funds are released

The Draw Reimbursement System
The Draw Reimbursement system is the better way of paying out funds to builders. This method also allows the homeowner or contractor to be in control of handling the money. The bank or financial institution takes the cost breakdown of the home’s construction and schedules a certain amount of draws based on the results. A draw is a release of funds based on a set schedule or as work is completed throughout the building process. The schedule can be weekly, bi-monthly, or monthly. Some bankers even allow the builder to be paid at anytime as long as the work is completed.

Benefits for the Draw Reimbursement system include:
• The homeowner and builder have better control
• Easier and less work
• Direct deposit for the builder when funds are released

Choosing the right system depends on what will work best for the homeowner. Whichever system they choose, they should make sure that they hire a builder who will accept it. Everything, including payment methods, should be gone over before getting started.

For large business managers and small business owners alike, commercial loans are a huge part of the process. In order to do business in today’s world, you have to have access to money on demand. When you have a big time expense, it is important to find commercial loans to handle that need. There are quite a few reasons why individuals get these types of loans. From the startup costs associated with beginning your business to the costs associated with continuing to expand, commercial needs are often large and pronounced. Additionally, it’s important to note that commercial loans are somewhat different than personal loans in terms of qualification, rate, and loan terms.

Commercial Mortgage Loans
Some loans for business are for their operational centers and these can be rather expensive. For these commercial mortgages, companies can take out millions of dollars worth of loans to purchase office space or to build their own office areas. For most personal mortgages, people have to go through a long run process to qualify for the loan. Commercials types are different, though, because they take a much harder look at long term profitability for the business instead of looking at the person’s ability to pay back the loan. The loan terms will generally be somewhat shorter, though, because businesses have the cash flow to pay back the loan more quickly without caving to large interest charges.

Loans on Demand
Commercial loans are much more on demand than typical personal loans. When a business needs money, they generally already have approval from various lenders, so it speeds up the process a great deal. This helps individual businesses come up with the funding that they need for various projects in order to take advantage of solid timing. This lack of red tape is a huge difference for the commercial lending market, as it requires much less reliance on credit. The traditional personal loan market revolves around credit and creditworthiness, so the processes are much more involved when trying to qualify.

Commercial Loans Backed by Collateral
One definition of commercial loans is somewhat different than the business definition offered above. Some lenders consider their commercial lending to be any type of loan giving that requires the borrower to put up real collateral. This is quite similar to business lending in that it’s not nearly as much about credit. With traditional consumer loans, all that is required is a signature and a solid credit history. Commercial loans require the backing of some collateral. In most cases, people will put their real estate holdings up in order to get these loans. Whether that is a piece of land that they own or it’s their family home, they have something backing the loan much more than the credit history and the promise of paying back the loan.

Depending upon which bank you are working with and where you are getting the loan, the definition of commercial lending defers. It always includes much more than just what a typical signature loan might require. Commercial loans operate on a different scale and they are usually much larger than run of the mill loans, which means that people generally use them for larger ventures. In most cases, these loans are necessary for starting up a business, whether they come in the form of a mortgage or otherwise.

Qualifying for a construction loan requires a good credit score and the ability to pay it back. What many homebuyers do not understand is that there is more to know than just the basics. A good rule of thumb to follow is to ask if you do not know or understand. For instance, loan to value and loan to cost are two examples of financial jargon that most of us do not have a clue as to what they are. Before signing any financial documents, ask the company to explain what they are and why are they so important in getting a home construction loan.

After submitting a construction loan application, a financial institution will look at two things: loan to value (LTV) and loan to cost (LTC). A loan to value is calculated by dividing the appraised value of the home by the loan amount. This percentage will determine how large or small your down payment will be. This typically is the better loan because the down payment may be a lot lower than having a loan to cost if you do not have enough equity. The downside with a loan to value is the land must not have any liens.

The loan to cost (LTC) is calculated on the amount of cash equity you have on hand to make as a down payment or to invest in the land you are building on. This loan is good for people who have paid off their land or have put down a substantial cash amount. Remember, that most banks require 5% to 20% cash equity before lending money to consumers. Therefore, it is a great idea to pay off as much of the land as possible to increase the land’s equity.

Owning a home is quite an achievement. It is the American dream for many families, which only gets better when you design and build your own home. Building your own is a great responsibility but there are questions you will have before undertaking the job. What pros and cons should you know about before committing to such a large project? The big question is, should you hire a builder or be an owner builder?

What You Should Know
Hiring someone to build your home is not that hard if you know exactly what you want. The plans are drawn, the layouts are complete, and they do all the hard work. However, when you decide to take the initiative and do it yourself, there are things you should know.

Construction to Permanent Loan
You will need a construction to permanent loan to become an owner builder. This loan requires you to hire someone to manage the construction. It should be an experienced builder, who is capable of guiding you with the cost and expenses. The biggest mistake owner builders make is overspending on budgets. They may end up borrowing more money, depleting their budget, or being foreclosing on before finishing the house.

If you do not want to deal with banks, seek out an owner builder program. They assist you with everything involved, including completing the construction to permanent loan application. A good owner builder program will let you borrow up to 100% to finance your home. They can also assist you with getting a mortgage after the house is complete.

Hiring the Right People
After you have your construction financed, you will need to hire contractors to work under you. Make sure to hire contractors who will not cheat you or take you for a ride. Research and interview each one carefully and thoroughly. You do not want to spend precious time trying to get people to come to work or complete projects on time.

Now it is time to start building!

Time and time again we are asked what the typical steps in qualifying for a construction loan are.  As such, we have written this article to shed light on the loan qualification process and have included all of the pertinent steps from beginning to end:

Income Verification
You will need to verify your income by providing copies of the last 2-3 years tax returns as well as copies of recent paystubs and your most recent W-2.  If you are self-employed, the qualification process will be more difficult as self-employed applicants are typically more likely to default on their loan obligations.  The income verification will demonstrate to the lender that you will be able to pay back the construction loan.

Credit Score Check
The lender will pull your credit reports from the three major credit reporting agencies; Experian, Equifax and TransUnion.  We highly recommend that you pull your own credit reports ahead of applying for a construction loan.  This way if there are any mistakes you will be able to fix them ahead of time instead of having to explain the mistake to your lender.  Typically, a minimum credit score of 700 is required for a loan amount over $417,000.  If your loan amount is less than this amount a credit score of 680 may be acceptable.

Debt to Income Ratio
There are two main kinds of Debt to Income Ratio (DTI for short) and they are usually expressed as a pair using the notation x/y (i.e. – 28/36).

The first DTI, known as the front ratio, indicates the percentage of income that goes toward housing costs, which for renters is the rent amount and for homeowners is a combination of the mortgage Principal, private mortgage Insurance, property Taxes and mortgage Interest, also known as PITI.

The second DTI, known as the back ratio, is the percentage of income that goes towards paying all recurring debt payments including but not limited to: PITI, car loan payments, recurring credit card payments, student loans, child support, alimony, etc.

The lower that your DTI numbers are, the more likely that you are to qualify for a construction loan.

Down Payment
You will need to have a required down payment, which is usually at least 20 percent of the total costs of construction.  This is typically required prior to commencement of construction.  If you already own the land on which you are building you may use this as equity towards the down payment.  Plans, permit fees and any site work you performed may also be considered as a part of your down payment.

Cash Reserves
Most construction loan lenders will require 6 months of PITI (mortgage principal, mortgage interest, property taxes and insurance) as reserves.  Typically, two months has to be cash and the other four months can be a combination of assets such as stocks, 401k, etc.

Hire the Right Contractor
The lender will have to approve the general contractor that you will be using to construct your home.  Therefore, make sure that they are reputable and that you have checked all of their references.  Each lender typically has a list of pre-approved architects and builders so be sure to ask them for this in order to expedite your approval process.

Hire the Right Architect
Make sure that they can design the house with your goals in mind while staying within your budge.  The lender will retain an estimator to ensure that the proposed design can be constructed within the budgeted amount.

Obtain Approval of the Construction Loan
Once all of your proposals are in for the actual cost of construction, the lender will then proceed with issuance of the construction loan so long as you are within the proposed budget.  The construction loan is then finalized once a certificate of occupancy is issued and the lender confirms the appraised value meets or exceeds the original estimated value of the house and property after construction.

Congratulations
If you have read this entire article you are know on your way to knowing the proper steps that you must follow to be approved for a home construction loan.