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Construction Loan
There are 3 different methods of financing a
construction project for building your new dream home in today’s
mortgage marketplace.
Lot Loan
The lot loan is usually for a 12 to 18 month term and is a short
term loan intended to secure the future site of construction for
a family or individual still shopping for a builder, contractor,
etc. This loan is traditionally based upon prime, however, there
are fixed venues available. This loan only secures financing for
the land itself with no improvements and is traditionally paid
off either at construction close or at the permanent financing
when the home is complete.
Construction Only Loan
A construction loan mortgage is traditionally taken out as
well on a Note with interest only payments due monthly for the
amount of money drawn to the builder. Traditionally, a series of
4 draws are given to the builder with lender and borrower
authorization as the house completion progresses. This loan can
also be taken out with a 6, 9, or 12 month construction term,
which means the builder must complete the house within this time
frame in order to payoff the construction note with the
permanent financing.
Construction-Permanent Loan
A single close loan has the construction financing and the
permanent loan all wrapped up in one financial transaction. The
consumer closes one time at the beginning and achieves the
construction financing and all draws being delivered to the
builder. Upon completion of the home the borrower can “modify”
or “rollover” to their permanent financing with a small fee if
the lender requires it, and just several documents necessary for
signature. This eliminates two sets of closing costs and
closings, yet has a potential to narrow the opportunity of
products available to the consumer for the permanent financing.
Each of the above options offer many benefits,
depending on how quickly the construction process can begin.
Remember these tips as you begin construction for potential
roadblocks with construction financing:
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Is your builder approved with your
Construction Lender?
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How is your land zoned? (Residential is
needed for Single Family Construction.)
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Do you have the verifiable minimum down
payment?
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How long do you intend to be in this home?
(To determine if you want an alternative product for
permanent financing.)
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