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I am a mortage loan officer. The type of construction loan I would recommend is what’s called a “One Time Close” construction perm mortgage. You have only one closing at the beginning. You can save by not having to pay double closing costs and you have no worry about getting re-approved for an end loan at the finish of construction. During the building process you pay interest only on the drawn amount at prime + (generally prime + 2%). When the house is completed the loan is modified to the final loan product such as a 30 year fixed or 5-1 ARM. There are many variations. There is a type where the 30 year rate is locked in at the start of construction. Another type is a “Float Down” where the rate floats up or down during construction with a maximum rate cap. We will do a Construction-Perm loan with as little as 5% down or equity in the land.
Most Mortgage Companys and Mortgage Brokers these days will not lend to an “Owner Builder”. In fact, they usually want a builder to supply a resume, a financial statement, and a list of subcontractors as proof they have a track record of building. You can still find some of the smaller local banks who will lend to an Owner Builder but you may find their rate and terms a bit higher.
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I've been searching the web, in vain so far, for a
comprehensive look at various types of
construction loans, with warnings about pitfalls.
At some point, obviously, I'll talk to some of my
local banks, but I'd rather go in with a little
foreknowledge.
*Are you looking at it from the perspective of getting a loan on your own house construction, or what? What type of construction? New? Do you own the lot? Remodeling? Do you have equity? Some detail here may help get some answers but I don't know of any websites to steer you to. Others may know of something.MD***
*I will want to buy land and have house built, for myself. I expect the land and house will amount to maybe $200,000, and expect to have maybe $50,000 in cash from savings.Would I be better off involving lender in EVERYTHING, land AND construction, from the get-go? (I mean, do I sort of put my money in the pot, pay x-amount down on land, with full payoff to come in x-months when house is finished and mortgage can be finalized? Or what?)
*Jim:Building a custom house requires more cash on hand than just buying a house outright.Having your land paid for gives you more leverage with the bank - they call it collateral! A popular type of loan in my parts for someone in your position is called a Construction to Perm loan. What that means is you get a construction loan at a regular inflated interest rate of around 9%, and then after the house is complete - usually a 1 year time limit - the loan is converted to a Perm loan (regular mortgage) at the going mortgage rate. You only have to pay a relatively small fee for the loan modification. This way you only have one loan closing (at the beginning of the construction phase). Normally a substantial down payment is required, but if your land is paid for, that can count toward the down payment.As for the construction portion of the const. to perm loan, a bank representative comes out for periodic inspections (usually anywhere between 5 and 15) to verify that a "chunk" of work has been completed prior to release of funds to you. The bank rep will likely have a check sheet of sorts (called a draw schedule) that assigns a percentage to each completed phase - say 2 % for the footers, 3% for the foundation, 3% for floor and walls etc, etc. That's how the draw amounts are determined; OK say you have footers & foundation completed - so the bank rep comes out and takes a look and then cuts you a check for 5% of the total cost of the house.This may require you to have some cash on hand, as the builder may want to get paid on Friday so he can pay his subs, whereas the bank rep may not be out until the following Tuesday to give you a draw. There are several different payment arrangements you can work out with your builder. Your payments on the construction loan are interest only on the money you have borrowed thus far. They can get pretty significant towards the end of the loan, that's why people get very antsy near the completion of the house.Plan for cost overruns and construction schedule delays.What you really need to do is go talk to some bankers - now. They love to talk to peolpe who have money!
*Jim:Building a custom house requires more cash on hand than just buying a house outright.Having your land paid for gives you more leverage with the bank - they call it collateral! A popular type of loan in my parts for someone in your position is called a Construction to Perm loan. What that means is you get a construction loan at a regular inflated interest rate of around 9%, and then after the house is complete - usually a 1 year time limit - the loan is converted to a Perm loan (regular mortgage) at the going mortgage rate. You only have to pay a relatively small fee for the loan modification. This way you only have one loan closing (at the beginning of the construction phase). Normally a substantial down payment is required, but if your land is paid for, that can count toward the down payment.As for the construction portion of the const. to perm loan, a bank representative comes out for periodic inspections (usually anywhere between 5 and 15) to verify that a "chunk" of work has been completed prior to release of funds to you. The bank rep will likely have a check sheet of sorts (called a draw schedule) that assigns a percentage to each completed phase - say 2 % for the footers, 3% for the foundation, 3% for floor and walls etc, etc. That's how the draw amounts are determined; OK say you have footers & foundation completed - so the bank rep comes out and takes a look and then cuts you a check for 5% of the total cost of the house.This may require you to have some cash on hand, as the builder may want to get paid on Friday so he can pay his subs, whereas the bank rep may not be out until the following Tuesday to give you a draw. There are several different payment arrangements you can work out with your builder. Your payments on the construction loan are interest only on the money you have borrowed thus far. They can get pretty significant towards the end of the loan, that's why people get very antsy near the completion of the house.Plan for cost overruns and construction schedule delays.What you really need to do is go talk to some bankers - now. They love to talk to peolpe who have money! P.S. Why didn't you post your question under the Business subfolder?
*Matt, thanks. (I though those folders were archived AFTER the threads first appeared here. Not true?)I'm hearing conflicting stories about having land in hand, unless, that is, one could have land AND a sizeable chunk of cash. If I could have, say, 25% of total cost (of land and house) in the bank, I should THINK a bank would set up something. I mean, I KNOW some will, because I found an on-line lender who offered several variations on the theme, in another state.I just don't know what all the variations are, so I can LOOK for the right things when I start hitting the banks. And, as I said, what to watch out for.
*You say "what to watch out for?" This is probably pretty obvious, but there are construction lenders out there who will lend to just about anybody. And they b chargefor it too! To some folks, a 12 or 13% short term loan may not seem like a big mistake, but for the kind of money were are talking about, it can easily add up to thousands over a year's period.I don't think you should be hesitant to go talk to bankers with little knowledge on the subject - I mean it's not like you are ready to sign something today. Further I think that you might find that there are not nearly as many different variations on a construction loan as say, a standard mortgage. Thanks for answering the question about the subfolders. I hope the sysop reads it.
*I am a mortage loan officer. The type of construction loan I would recommend is what's called a "One Time Close" construction perm mortgage. You have only one closing at the beginning. You can save by not having to pay double closing costs and you have no worry about getting re-approved for an end loan at the finish of construction. During the building process you pay interest only on the drawn amount at prime + (generally prime + 2%). When the house is completed the loan is modified to the final loan product such as a 30 year fixed or 5-1 ARM. There are many variations. There is a type where the 30 year rate is locked in at the start of construction. Another type is a "Float Down" where the rate floats up or down during construction with a maximum rate cap. We will do a Construction-Perm loan with as little as 5% down or equity in the land.Most Mortgage Companys and Mortgage Brokers these days will not lend to an "Owner Builder". In fact, they usually want a builder to supply a resume, a financial statement, and a list of subcontractors as proof they have a track record of building. You can still find some of the smaller local banks who will lend to an Owner Builder but you may find their rate and terms a bit higher.
*Mark, thanks.I had assumed that I'd have a lot easier time with a lender if a "real" builder handled the whole thing.So if I walked into your office BEFORE buying land (but after choosing land and builder and home design), and the whole project was going to be $200,000 (75k land), and I had $50,000 cash, what would you advise about land purchase? Do it separately? My experience (limited) has been that land sellers generally want a higher interest than going home mortgages, for a shorter period, but will move off the price for cash.Do you ever work a deal where, with land seller approval, he gets a certain (substantial) amount of faith money, then is paid in full when house is completed and loan is rolled over?And, how widespread do you think the new wrinkles in mortgages are going to be? I read in the SF paper last Sunday about built-in equity lines, rate reduction on demand, portable mortgages. Apparently, the first two are offered now by Cou
*Damn thing keeps cutting me off. Countrywide.com was, I believe, the mortgage company.