Construction Loan Faqs

By Author: Michael Price
Total Articles: 114
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Construction loans are used to finance the new construction of a home. Since these loans are not made on inhabitable properties, the terms are quite different than those of conventional mortgages. If you are interested in building your own home, it's important that you thoroughly research lenders and programs. In general, financing the construction of a home can be less costly that an outright purchase, if handled correctly. Janks Construction can help you with all of your construction needs.

This type of financing differs from regular purchase money or refinance home mortgages in the way the loan amount is calculated and the way it is structured.

Before calculating the loan amount, we need a basic budget.

The main components of construction loans that are included in the budget are:

1. Soft costs; consisting of architectural plans, engineering and permit fees.
2. Hard costs; which are all the actual physical costs of construction.
3. Closing costs; consisting of origination and lender fees, title, and closing fees.
4. Inspection fees.
5. Reserves; consisting of interest reserve ...
... and contingency reserve.
6. Existing lot pay off.

Basics
Most constructions loans are revolving accounts that require interest-only payments during the construction period. Most homeowners are not completely sure how much a project will cost, and will need to access the credit line for surprise expenses and over-budget problems. It is up to you and your lender how the cash advances will work, but most often the payments will be low. Rates on construction loans are often adjustable and based on the Prime Rate.

Obtaining a Construction Loan
When applying for a construction loan, it is the borrower's responsibility to paint a picture of the construction process. A prospective borrower should come to a loan meeting armed with estimates and cost projections to support their case for a construction loan. Borrowers must be able to talk intelligently, in detail, about the plans, contractors, materials, blueprints, and potential delays on a construction project. The more articulate you are about your plan, the more likely you'll be able to convince a loan officer.

Construction-Permanent Programs
Most straight construction loans come due when the project is completed. This forces borrowers to refinance their construction loans. Alternatively, there are Construction-Permanent mortgages that require only one closing. These loans have predetermined periods of time in which the construction loan will be active, after which the permanent, conventional loan will commence. It's important to leave ample time for construction, as in most cases, delays are inevitable.

Rate Locking
Another option for construction loan borrowers is a rate-lock agreement. Most brokers and lenders will lock in a rate to be charged at a future date on a future loan--usually no more than 60 days. These certificates must be obtained before construction is complete. Such agreements reduce the stress of refinancing immediately after a construction project.

Loan Amounts
A crucial component of a construction project is accurately estimating the amount of money you'll need. While it's best to overestimate--based on estimates from contractors--you do not want to end up with too much money left over. Any money that is unused should be left either on the credit line or paid back to the bank during the refinance or conversion to a permanent loan.

Improve your home with Janks Construction

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Janks Construction was founded 12 years ago by Steve Janks. Janks Construction has over 25 years experience in converting homes to dream homes in the San Diego area.