two types of construction loans, says Penn Johnson, president of Stamford
Mortgage, a company which provides construction loans throughout Connecticut.
One is a straight, short-term construction loan, which does not automatically
convert to permanent financing. The drawback to this is when construction is
complete, you must pay another set of closing costs. And interest rates could
be higher at that time.
better option, Penn says, is a construction-to-permanent financing loan. This
type of loan gives you money to buy the land and build the house. As the house
is completed, the loan rolls into permanent financing.
construction-to-permanent loan is a multiple advance loan. “You’ll get the
money in stages,” Penn says. “First toward the purchase of land, more as you
get the shell of the house up, more again as you begin putting in electrical
Three Basic Steps for Financing
1. Evaluate your financial capacity.
set your project budget. “There’s no use designing this beautiful house if it’s
$200,000 more than you can afford. Get pre-approved,” says Penn.
banks, such as Wells Fargo, offer a no-obligation prequalification consultation
to help you estimate how much you might be able to borrow.
2. Find land, your house plans, and a builder.
need these three things to apply for the loan,” says Penn. “The bank will ask
you for your plans. They’ll also want the cost estimate, which the builder will
3. Apply for the loan.
really no difference between a mortgage company and a bank, according to Penn.
If you’re seeking a bank, check with the local ones: “I’ve been in this
business 30 years, and construction-to-permanent financing loans tend to come
from the small local banks. They’re the ones that do this best.”
lender will look at the cost estimate and suggest an advance schedule. This
could pay out in four to six advances during construction. When your builder
completes each stage, they call the bank, an inspector visits, and they advance
Three Important Tips
--Find an experienced loan officer.
seeking a lender, it’s important to find a loan officer with plenty of
experience with construction loans. “They’re the ones who will explain the
process. They need to be a good communicator and have done a lot of this kind
of lending,” Penn explains. “If the loan officer has only done a couple of
these, it will be bumpy. It doesn’t matter if you use a mortgage broker or a
banker, as long as he or she has the experience.”
--Be prepared to put 20% down.
generally need 20% because it’s hard to get private mortgage insurance on a
construction mortgage. “I’ve heard it’s possible, but have never seen it,” Penn
is for the total cost of the project, but includes the money you may have
already paid for the land. “If you paid $100,000 for land, and need $400,000
for the house, the total is $500,000. You’ve got the 20 percent and could get
the loan,” he explains.
--Understand the advance schedule.
your toes and make sure the builder understands the advance schedule and
accepts it. Some builders are more liquid on when they need the money. Others
need it following a more strict schedule. The bank will assume the schedule
will work, so it’s not always set out too clearly.”