Monday, April 18, 2005

Custom Construction Loans

Construction Lenders offer a range of funding options for Owners, Owner/Builders and Investors of 1-4 Unit Residential Dwellings for up to $6 million dollars.
It wasn't so long ago that if you wanted to build your own home, you had to first either buy your land or get a lot loan, then get a construction loan, pay the closing costs, build the home, and then refinance the whole kitandkaboodle into a mortgage = 3 hassles and 3 sets of closing costs!

Custom-Perm Loans (1- Step, 2-Step or One Time Close)
Custom Construction loans are designed to allow a home owner or investor to custom build a home and cover the cost of land, design fees, contractor(s) and other hard costs in one loan.
After the Construction Term (4 months to 2 years) is finished, your loan is then converted or ‘rolled over’ into a Permanent Mortgage. There are no closing costs when you convert from the construction phase to your permanent mortgage unless you change lenders.
Interest payments may be rolled into the loan so you don’t have to make payments out of pocket while you are building. A guaranteed interest rate at roll-over may be negotiated at the beginning of the construction term, as long as your project is on time and budget. The advantage to a builder is that the borrower carries the financial risk. The advantage to the homeowner is true ownership of the project and the ability to personalize the final home to a far greater degree than a ‘Spec’ home.


Renovation Loans
These loans are designed to allow a prospective Home Owner or Investor to acquire a home in need of repair with extra funds for the purpose of upgrading the home. An appraisal determines the ‘as is’ value and the ‘as built’ value of the home. Your lender manages your budgeted renovation funds for up to 6 months, during which time payments are on a monthly schedule, until the final appraisal or inspection is complete. There is also one closing, similar to the Custom-Perm loan.

Land and Lot Loans
These loans allow prospective home owners to acquire land upon which to build a home. The terms are usually for 1-5 years, after which time you may convert to a Construction Loan. Lenders require 25-30% down payment due to the higher risk of an unimproved property.

Bridge Loans
If you currently own a home (in your lender's licensed region) with significant equity, some lenders will allow you to 'tap' that equity during the building phase, assuming you sell current home after your new home is finished.

Lender Criteria
If you have very good credit and can effectively navigate paperwork; you may be a good candidate for a construction loan. They require much more effort than a standard mortgage! Lenders rate risk on the same criteria as conventional loans, with moderately higher rates during the short Construction term due to the higher risk involved.

Custom Building Advantages
There are real advantages to both the builder and homeowner. For starters, your builder will appreciate not having to wear the financial risk (or tying up assets) and being paid every month. As the homeowner, you have real ownership of the project. One advantage is saving at least one set of closing costs. When you purchase a home from a builder, their financing costs are passed onto the buyer. As a homeowner in charge--chances are you can build in a higher quality standard in your upgrades and personalized finishes than you would with a spec built home.

A word of encouragement: find a good builder or consultant to oversee your project and don't try to do everything yourself unless you have extensive and recent building experience!

Wishing you every building success! 

©2005 susan templeton