Construction Loans, Explained.

Construction Loan… sound pretty awesome and kind of scary at the same time??

The thought of obtaining a construction loan to build a house that’s perfect for you can seem a little intimidating. It may sound too good to be true, expensive, time consuming, and difficult at first. I’m over here trying to tell you it’s not so scary at all! Let me first explain to you how it works.

First thing is first, you want to find the right lot and a reputable builder. Lots for example in Eagle Ridge can be purchased w/ your custom home builder Paras Homes, LLC and your search could end there. However, you can purchase any lot and hire any builder you would like.

Once you’ve found yourself a lot, you will want to work with the builder of your choice to decide on floor plans and figure out building plans. All of those building plans are going to need to be submitted to your lender when you make application for the construction loan.

Now, here’s a little bit on how the loan works. This type of loan is a little more risky in the eyes of the lender because there is no collateral, no house built yet. This is why you will be required to secure a 20% down payment on the loan. That’s 20% of the full price of home after completion. Your builder will have the final price determined for you. In most cases, you will also be required to secure a non-refundable  $5,000 E.M check to the builder, this price could be higher depending on upgrades you’ve chosen within your package arrangement. – You must also be able to pay your own closing costs, you will consult with your lender for an estimate of those costs. The next step is for your lender to order an appraisal of the total product/plans before loan approval.

Once you have your final approval of the loan , you will have your first closing, and own the land. Now, starts the “new loan” or “continued loan” for the house. Now your lender will work with the builder and schedule draws throughout the process to pay the costs accumulating during the construction of your home. There are 5 main draws typically. Slab, framing, roof, interior, and final touches.

You can think of this part of the process as a line of credit.  You are only paying interest on the amount of money being borrowed at a time. I might add that your interest during this period is typically at a higher rate but may lower at the time of completion. Your balance starts at zero and increases after each draw. Your lender will manage inspections by sending someone out to the property, ensure building requirements have been met, and then handles scheduled draws. Alleviating the hassle for you.

By the time construction is complete you can decide how you would like to lock in your interest rates (FIXED vs ARM, or 15 YR VS 30YR, etc…) and pay on your mortgage just like normal. There you have it! Just be sure to find yourself a reputable, qualified lender to assist you with this process.

Please email me at courtneydavis@windermere.com if you have any questions or would like to chat more about new construction options 😊

Have an amazing day!!