Home Construction Loans are the most exciting and possibly the most frustrating kind of loan you can experience. It is just plain fun to design a home for yourself and then watch it being built from the foundation up. Nobody has ever lived in it before. You decide on the appliances, wall colors and carpets. What could be better?
The frustrating part happens if you don't understand how the lender looks at a home construction loan. CHome construction loans are "story loans". That means that the lender has to know the story behind the planned construction loan before they'll be willing to loan you money. Because it's a "story loan", it's not going to be standardized like mortgage loans underwritten to Freddie Mac or Fannie Mae guidelines. There are some common features to a home construction loan. Construction mortgage loans typically require interest-only payments during the building phase and become due upon completion. Completion for homeowners means that the house has its certificate of occupancy. Home construction loans are also very paperwork-intensive.
Home construction loans are usually variable-rate loans priced at a spread to the prime rate or some other short-term interest rate. The contractor, you and the lender agree on a draw schedule based on stages of construction, and interest is charged on the amount of money disbursed to date. Some home construction loan programs allow you to add money to the loan amount to cover the cost of payments during the building phase.
One variable in home construction loans is how much of the project cost the lender is willing to lend. If you already own the land, it can be considered as equity on the construction loan. In many cases, but not all, you must have owned the property for at least one year to use the appraised value of the property.
Most buyers use "Construction-to-Permanent" financing programs. With these home construction loan programs, the home construction loan is converted to a permanent mortgage loan after the certificate of occupancy is issued. The advantage is that you only have to have one application and one closing.
Depending on current interest rate trends, you may wish to purchase a rate-lock agreement valid through the expected completion of the construction. Just make sure you allow for the inevitable construction delays.
