How do Construction Loans work?

That is a pretty simple question.  Unfortunately, because Construction Loans are much more detailed and complex than a traditional mortgage, the answer can be anything but simple.  Here is a list of the top 7 things you should consider before starting a Construction Loan.  This list will give you a better idea of what is involved.  (to get a better idea of steps and process of a Construction Loan, but be sure to speak with a Construction Loan Lender.

1. Credit is credit.  The credit underwriting process for a Construction Loan is similar to a traditional mortgage.  Remember the rule of 2:
   • Last 2 pay stubs
   • Last 2 asset statements (bank statements)
   • Last 2 Years W2’s
   • Last 2 Years Federal Tax Returns
2. A construction loan is also referred to as a “construction to permanent” loan. There is a construction phase of the loan (where the borrower typically pays interest only) and a permanent phase (where the loan coverts to the full amortization~ principle, interest, taxes, and homeowners insurance)
3. Not all Lenders are created equal.  Some Lenders will offer a One Time Construction Loan others offer a Two Time Close.  Depending on the Lender you choose, the costs associated with the loan could be much higher and the process much lengthier.
4. Are you building the home yourself or hiring a General Contractor?   Not many Lenders allow borrowers to build their own home (due to the risks involved).  If you plan to build your home be sure to ask your Lender if they allow “self-builds.”  Also, if they do, what are the requirements?
5. What happens if I have cost over-runs?  Most people go into a Construction project with a set budget:  cost of build, monthly mortgage payment, cost to furnish new home, etc.  Keep in mind, especially in today’s world, cost over-runs are a very real threat.  Be sure to discuss how your Lender and builder address cost over-runs.
6. What is the timeframe for the build?  Material and labor delays can slow a new construction project.  More times than not a month project turns into a 12 plus month project.  Discuss with your Builder and Lender the ramifications of delays.
7. After my Construction Loan closes, when does the build begin?   Most Lenders have a requirement on when the build needs to start after your loan closes.  Be sure to discuss this with your lender and builder.

There are few more detailed steps in this process.  The key to a seamless build is putting together a dream team. At BuildButler we have put together a team of trusted professionals to help you along the way.