Why Construction Loans may be the perfect option for you
You have searched the MLS and been to 100 open houses. You have seen every floor plan available in the neighborhoods you want. You even do extensive research to make sure you are being offered the best price for the home. These are great and effective ways in going about your next home purchase, however, none of these options are more rewarding than having the home built exactly the way you want it. Construction loans will be something you will want to explore.
Construction loans offer you the option to get the financing you need for the construction of your new home. Now you can design it the way it was intended to be, exactly the way you want it. From initial builder plans to purchasing the land lot, there are many steps in the Construction loan process that you need to pay attention to.
How Construction Loans Work
The buyer meets with an architect to get plans to build the home
Buyer acquires Land Lot usually through financing or cash.
Plans are given to General Contractor to build home
A loan is given to the buyer based upon LTC, or Loan To Cost -A loan is usually a 6, 9, or 1-year term in an effort to give the General Contractor enough time to build.
After the construction loan, you will get your permanent financing issued. This usually is a one-time close, where you do not have to go through the pre-qualification process again and pay another set of closing costs.
The amount of money to build the home in relation to what it is worth. For example, an LTC of 80%, means that the home lender will lend 80 %.
A $500,000 appraised home that costs $400,000 to build will have an 80% LTC. In this scenario, the borrower is taking advantage of the low costs of wholesale construction, and can actually move into the home, if built correctly and on time, into an equity position.
Types of Construction Loans Offered
FHA - One-time close that will utilize the land acquisition as an equity position to calculate loan value. Normal minimum FHA rules apply with regards to a minimum 3.5% down payment and county loan limits will vary.
VA - One time close with ZERO down with a valid Certificate of Eligibility from the VA. County loan amount limits will vary
USDA - One-time close with ZERO down. Will need to make sure the address is USDA compliant by clicking here.
Do I need to own the land first in order to complete a construction loan?
Yes, you will need to either own the land outright, have financing in place on the land, or have a contract with the seller with a close date set, so they know exactly when they will be paid from the construction loan.
Do I need to have 20% down?
No, for VA you need zero down, FHA 3.5% down, conventional 10% down, and jumbo 15% down for owner-occupied residences. You can use the land as equity towards your down payment as well for the overall project.
Do you require assets as a reserve requirement?
No, for VA, FHA, and USDA. For conventional, it is usually what our Desktop Underwriter will state. For Jumbo, the reserve requirement is 9 months of Principal, Interest, Taxes, and Insurance.
Do you know where to get land loans?
Yes, in most cases the seller will provide owner financing, and local credit unions, and banks will lend up to 90-100% LTV on the land value, with terms ranging from 1-15 years, so you can focus on your project.
What kind of homes will you lend on for construction loans?
Single Family Homes, Manufactured Homes, Custom Homes, Modular Homes. NO to tiny homes, kit homes, log cabins, geodesic dome homes, or barn homes.
What kind of terms do you offer on construction loans?
6 months up to 24 months, depending on the loan program. For conventional and jumbo up to 24 months. FHA, VA, and USDA no longer than 12 months.
Do you provide recommendations for General Contractors to hire?
We do not. It will be your job to find a general contractor that is properly licensed and insured. We do have to approve all general contractors, so it is important they send us all required documentation including the final bid for your project, in a timely manner.
What is the process, and how do I get started?
The first step is to get credit qualified so you know you can handle the mortgage payment once construction is fully completed. After that, you would look for where you would like to purchase the lot, where you will build your dream home. Shortly after that, I would start looking for general contractors in the area, who can assist with all of your soft costs, including architecture and engineering. Finally, once you have all your plans and specs done, the general contractor will issue you a final bid for the entire project, including the cost of construction.
Why would I use a mortgage broker and not my local bank?
I encourage you to shop around, as every bank and lender will be different in their requirements. What I have found out is that many local banks will have stringent requirements when lending on new build construction. These include overlays they do not discuss with you upfront, which can cause delays or potential loan denials as you get through the underwriting process. This includes Asset Requirements are too much, as they want 12 to 18 months of reserves in the bank, debt to Income Ratios are set at low levels not to exceed 38% in some cases, they use the lower of the 2 - Cost of construction vs Future Appraised Value to land at the Final Loan to Value of Project, and very high credit score requirements.
What kind of mortgage can I get on Construction Lending?
You will get a Time Close, so no need for 2 sets of closing costs. You will pay interest only on the money you borrow during construction, and that rate will convert to a 30-year fix, once the construction period is fully completed, and you are issued your Certificate of Occupancy. For example, if you borrow $50,000 in the first month for your 1st draw, which includes all building permits, some foundation work, etc, you will pay interest only on say 4%, until you take your next draw, thus will increase your payment in month 2.
Hello, my name is Brian Quigley and I have been a mortgage broker in Denver, CO since 2003. I have been fortunate enough to choose this very rewarding mortgage broker career and help thousands of borrowers over the years.