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New construction loans?

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Anonymous
Not applicable

New construction loans?

Are loans to build a home easier or harder to get than existing home loan?
Message 1 of 6
5 REPLIES 5
ShanetheMortgageMan
Super Contributor

Re: New construction loans?

Construction loans are very similar to qualifying for a permanent financing mortgage these days. The most common construction loan is the construction-to-permanent loan (CTP), it's a construction loan that automatically converts into a permanent loan after the construction period is over. The benefit to this type of loan is that you don't need to refinance after the construction is finished, so you just need to qualify once. This also saves you fom having to pay closing costs again. However the rates on these loans are generally higher than just qualifying for permanent financing, so sometimes refinancing at the end can be beneficial, just depends on where rates are.

With most lenders there are two parts, the first is qualifying for the financing portion and the second part is qualifying for the construction loan. When you own the land already qualifying for the financing portion is much like qualifying for a refinance. There are LTV restrictions as well as FICO, reserves, and often income requirements. The value that is used is the appraised value of the home you are building as if it were to be finished today, so an appraiser will take the plans & materials list and perhaps a sketch, and find comparable homes to determine the value. The loan amount can be made up of anything you'd owe on the land, plus the board & nails costs the general contractor has said the home would cost to build, any permit/impact fees, your loans closing costs, and an interest reserve to make the payments from during the construction period. Typically lenders like to see you have 5% equity after everything is calculated.  If you are purchasing the land then the 5% is usually a required down payment on the total project costs.

For the second part, qualifying for the construction portion, your builder is checked out, it can be as simple as just requiring some signed disclosure, disbursement, and insurance requirement forms, or they might want to get a resume, a copy of the GC license, and other items. Basically this is making sure your builder is established and can properly build a home. Sometimes you can build your own home and save on the cost of a GC fee, and hire a site supervisor instead. Each construction lender has slightly different guidelines.
Free Mortgage Advice & Pre-Approvals (FHA, VA, USDA, Fannie, Freddie, Non-Prime, Construction, Renovation/Rehab, Commercial) since 2002
Located in Southern California and lending in all 50 states
Message 2 of 6
Anonymous
Not applicable

Re: New construction loans?

Wow that sound complicated. So if I do qualify for all this later on, will I have to make payments on the loan before the house is built or do they let you wait until the house is complete?
Message 3 of 6
ShanetheMortgageMan
Super Contributor

Re: New construction loans?

It's a little more complicated, but only because there is the builder approval part... the rest of it is very similar to a permanent financing mortgage, except for instead of a sales price on a home, it's the total cost on the building project.  Most construction loans have an interest reserve that is part of the funded loan amount, the amount of the interest reserve is calculated by the planned construction term you and your builder (general contractor) agree upon.  This interest reserve is equivalent to the amount of the mortgage payments during that construction term, and each month your mortgage payment is deducted from the interest reserve... so your payments are essentially built into the loan amount.  You do pay "interest on interest", but it saves you from having to make double housing payments (one for the new home and one for where you are living while the home is being built).
Free Mortgage Advice & Pre-Approvals (FHA, VA, USDA, Fannie, Freddie, Non-Prime, Construction, Renovation/Rehab, Commercial) since 2002
Located in Southern California and lending in all 50 states
Message 4 of 6
Anonymous
Not applicable

Re: New construction loans?

Bizzzzumb

Got a question for Shane regarding this topic. Above you stated:
There are LTV restrictions as well as FICO, reserves, and often income requirements. The value that is used is the appraised value of the home you are building as if it were to be finished today, so an appraiser will take the plans & materials list and perhaps a sketch, and find comparable homes to determine the value.

I will need to finance the land and construction together. I plan on building in an urban area (Seattle) which seems to me could pose a problem considering the following issues:

1. Lot sizes can vary tremendously in the city, a person almost has to chose the land then a floor plan to fit it.
2. Lots vary in price depending on which part of the city your in. (buy in good location build a cheaper/smaller house or nicer house in a cheaper neighborhood)
3. Not a huge selection of lots in the city, need to pounce if you find something decent. Pre-approved funds would be nice to have.

Since the property could be driving my initial decisions, how could I go about getting financing when I will most likely have some unknowns about the project?

Hope I didn't yammer to much!
Message 5 of 6
ShanetheMortgageMan
Super Contributor

Re: New construction loans?

In a quick market like you are experiencing in Seattle (in terms of available lots to build on) you need to make sure all of your ducks are lined up in a row.... and both you and the seller need to realize that the purchase is very contingent upon being approved for the final loan.  This isn't a quick slam dunk process, but usually people who are selling lots don't expect them to be since it's a rather unconventional loan program.  I'd select varying architecture plans depending on the lot size, and get pre-approved for the highest loan amount that you figure you'd need to qualify for.  Then you could size it down if you end up choosing a lot/plan that is less expensive.
Free Mortgage Advice & Pre-Approvals (FHA, VA, USDA, Fannie, Freddie, Non-Prime, Construction, Renovation/Rehab, Commercial) since 2002
Located in Southern California and lending in all 50 states
Message 6 of 6
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