Construction Loans | New Homes Market Center

There are several possibilities to consider when looking for financing to build a custom home. The first step is to get pre-qualified for your construction loan. A lender will review your income, assets, debt and credit history and give you an idea of what construction loan amount for which you qualify. This is a good guideline for your budget, and you can use this figure to help you with plans and upgrades by staying within this number. When constructing a home, it is always good to make allowances for changes or cost overruns that may take you over your budget.

The second step is to identify the lot that you want to build on and the builder that you’re going to use. In some very rare cases, the builder will be willing to carry the financing for the project. This is generally only the case with large “tract” or production builders with whom you lose the flexibility that you have with a custom builder. Once you decide on a lot and builder, and a determination is made that you will carry the financing for the construction loan, the next question to answer is how you intend to pay for the lot. Read more about lot selection.

There are basically three choices when it comes to paying for the lot.

You can pay cash for it, finance it by itself, or finance it as part of a construction loan. If you don’t have the cash to pay for the lot or if you simply have better things to do with your cash and prefer to finance, the question boils down to the two latter choices. The decision is then based on one critical question, when do you intend to build? If you intend to hold the lot and build sometime in the future, then you get a lot loan. If you plan to start construction any time in the next six months, then roll the lot into a construction loan to avoid paying closing costs on the lot loan and then, only a few months later, paying many of the same closing costs on the construction loan.

Once you determine that it is time for you to get a construction loan, the third step in the process is deciding between a one or two time close. You can choose to get an interim construction loan, and when the project is done, obtain long term financing in the form of a mortgage. This is commonly referred to as a “two time close,” or you can do a “one time close” loan, which secures the interim financing and the long term financing all at the same time. In both cases, you’re getting the same two loans, it’s just a question of how you want to structure your closing costs and how much money you want to put into the project from your own pocket. Read more about the pros and cons of one and two time closes. After you make the decision on a one or two time close, you’re done making your construction financing decisions.

Are you ready to pre-qualify for your construction financing?

Here are some of the items that the lender may ask you for upfront to help with the pre-qualification. If you have not chosen your builder yet – don’t worry because the lender will pre-qualify you and then you can proceed with the builder file when you select the builder and plans.

Be prepared to provide the following information:

• Loan Application (1003 with disclosures)
• Settlement Statement from purchase of Lot.
• Current Lender/Loan information (for payoff of lot if financed)
• Survey

Once you finalize a builder and your plans, you must forward the following information to your lender:

• Plans/Specs (3 sets)
• Construction Cost Breakdown
• Construction Contract
• Builders Resume with References
• Builders Risk and GL Insurance information

We have built up a wealth of resources and lenders that can assist you with the entire process. If you’re ready to get started or have any questions about the process, give us a call toll free (866) 897-3777 or click here to get matched with a construction lender or builder to get your project underway and on the right track.

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