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Construction Loans

You've dreamed about building your own home.  Now you're ready.  So many things to do before you break ground. It's important to plan and know the correct things to do ahead of time.

The first thing you'll want to do is start working with a construction lender. One who is familiar with construction loans. You will need to complete a loan application and get pre-qualified for the construction loan and the permanent financing (takeout loan).  You should be prepared to discuss what you will do with your existing home.  Will you sell it or rent it?  Discussing your financial situation early allows you to determine the loan amount that you will be able to afford.

After you know the loan amount you qualify for, you will want to look at some plans and interview architects or contractors. They will to give you an idea of what it will cost to have professional plans drawn.

Once the plans are completed, you can have different general contractors bid the entire job.  Discuss quality of construction, add-ons, and changes, then check references.  Hiring a general contractor will be the most important thing you do. You will be in a close relationship with him for many months. Make sure that you both understand each other and document everything discussed in writing.

After the general contractor has been hired, he will work with the lender providing the necessary contractor documents for the construction loan.  Once the construction loan funds, its time to start building.

Loan to Value: Independent Mortgage will lend good credit borrowers up to 95% of the appraised value of your project. The  borrower should have 5% of that value either from cash into the deal or land equity. There are also programs for lesser credit borrowers with loan to values less than 90% of the appraised value.

Terms: Construction loans have terms of from 55 days to 1 year before the takeout or permanent financing. And there may be extensions in case your project takes longer than originally scheduled. These extensions may have a fee associated with them. 

Rollover Loans: Rollover loans lend you money for the land purchase, construction of the home and the permanent home loan all in one transaction. The loan begins as a construction loan, with interest due on the funds drawn out, then rolls over after the construction period and begins to amortize with principal & interest payments due monthly. The benefit is that the borrower only has to qualify once, sign loan papers one time, and most importantly only pay one set of closing costs.

Construction Only: Fixed rates for the construction term, at interest rates higher than normal home loan interest rates.  You pay interest on only the amount that is drawn out each month and the loan is due at the end of the construction period.  It will then have to be replaced by a "takeout" loan which replaces the construction loan. The benefit is that there is more flexibility in underwriting, and you have a choice from a wider variety of different permanent loans.

Draw System: The majority of construction loans use a draw system which allows the owner or contractor to draw out funds from the lender based on the stages of completion of construction. The owner or contractor can then use those funds to directly pay for labor or materials. The number of draws varies based on the projected needed disbursements during the construction period. 

If you have questions regarding the lending process for construction loans, please email our construction loan department .

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