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Construction Loan
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Home construction loans are an excellent method of obtaining the cash necessary to make home improvements or renovations. In this way, the construction loan is a good real estate investment leading to profits upon the future sale of the home. Real estate property value generally tends to rise over time.
1) First
you will need to provide plans, specifications, and a fixed
price builder contract. If you are acting as your own
contractor
you will need to provide a cost breakdown plus
subcontractor's bids/fixed price contracts to a
lender.
2)
Prior to disbursement of funds, you will need to provide: a copy of
the building permit and hazard/builders risk insurance. Prior to
your loan's conversion to permanent
financing lender may require updated hazard
insurance, well certification, a final survey, and the use and
occupancy certificate. Other items may be required depending on the
type of construction and permanent loan
selection.
3) Your
disbursement funds are handled either by a Title Company or
Settlement Attorney.
4) Draw
Schedule: The "Draw Schedule" details the amount available to be
disbursed and requirements that need to be met throughout the
construction process. Generally, there are 3 to 6 draws. Draws are
disbursed by the Title company after inspection by the appraiser to
verify the work. You will receive a draw schedule prior to closing.
Draw
Schedule Possible Outline: a).. First Draw
(Slab/Foundation) 15%. This draw will purchase land if not
owned. The draw is released at closing. Any builder "soft
costs" such as permits are added to this advance. Septic and any
site work is also included. The loan fees, attorneys fees, title
insurance, etc. are paid at closing. b).. Second
Draw (Framing/Rough Carpentry) 10% This draw is released when
foundation is poured. First floor walls and sub flooring in place
with exterior walls sheathed. c).. Third Draw
(Roof/Mechanicals) 20% The draw will include second floor sub
flooring and walls, roof framing, rough plumbing electrical and HVAC
inspected, and any miscellaneous items like garages and
pools. d).. Fourth Draw
(Exterior/Interior Finishes) 20%. The draw includes doors and
windows installed, drywall installed, exterior siding or painting
complete e).. Fifth Draw
(Trim-out) 20%. Draw includes all interior trim, cabinets,
paint and final plumbing HVAC and
electrical f).. Final Draw (Project
Closeout) 15% Draw includes all decks and patios, house cleaned.
appliances , and any landscaping. The final inspection and occupancy
permits are issued. 5) Your
funds are disbursed by check to either you and your builder
jointly, you, or your builder.
6) How you will pay for the cost: Payments are interest only based on the outstanding balance and are due on the first of each month. For example: a bill is mailed to you 15 days before the payment is due. 7) Modification: Modification is the process of converting your construction loan into the permanent loan of your choice after construction is complete. 8) Loan Options: There are many other loan options available. Please discuss this with your lender.
“Two
Step” or Prime Based Construction Loan
Program “OneStep” or Lock and Build Program As an alternative to the Prime based programs, several lenders offer construction programs, which offer fixed rates during both the construction and the permanent phases of your loan. These programs have the advantages of eliminating potential increases in the Prime Rate during construction. Another important benefit of these newer programs is to eliminate the need to pay an extended lock fee if rates are rising. However, long term (30 and 15 year fixed) rates are higher than mortgage rates would be if you were purchasing an existing home because the lender is effectively paying for your extended lock cost and is adding the cost to your rate. Some lenders are now offering a flexible program, which gives you a fixed rate during construction and a single rate adjustment at modification. |
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DRAW vs.
VOUCHER Draw System: The majority of construction loans use the draw system.A draw system allows the owner or contractor to draw out funds from the lender based on the stages of completion of construction.The owner or contractor can then use those funds to directly pay for labor or materials. The number of draws can vary anywhere from 5 to 10 disbursements during the construction period, depending on the lender's policy. The advantage of this system is that the owner or contractor has more control over the money. Voucher System: In the voucher system, the owner or contractor presents individual bills or receipts to the lender for reimbursement or payment. The lender then pays or reimburses upon receipt. The advantage of this system is that bills will be paid without regard to stages of completion of construction |
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The construction loan is a
preferred method The construction loan is
individualized It is generally accepted that
renovations and home improvements cause a financial strain on the
borrower even with the added assistance of the construction loan.
For this reason, it is common that the construction loan will
require only interest-only payments throughout the construction
period of the loan. This helps to ease the burden of construction
costs. The construction loan relies
on home equity Construction terminology: ABS: acrylonitrile-butadiene-styrene, the chemical makeup of a black, plastic-composite plumbing pipe used extensively for drain, waste, and vent systems. AC: alternating current, the most common method of delivering electricity in North America. AWG: American Wire Gauge, the U.S. standard for the size of various types of wire, including electrical wire. bd. ft. (also bf): board foot, a standard hardwood and softwood unit of measure equal to 1 inch thick, 12 inches wide, and 12 inches long. Btu: British thermal unit, a standard unit for the measurement of heat, approximately equal to the heat given off by one kitchen match. CAD: computer-assisted drafting. Also computer-assisted design. CFM: cubic feet per minute, a measurement of how fast air moves. cip: cast iron pipe. cmu: concrete masonry unit, such as a concrete block. d: penny, a common designation for the size of nails. db: decibel, a standardized unit of measure for sound or noise. DC: direct current, as from a battery. DF-L: Douglas fir – larch, a common species of softwood extensively used from framing lumber. dia. (also diam.): diameter. DWV: drain, waste and vent, the system of plumbing pipes used in the removal of liquid and solid waste from a building. FAS: firsts and seconds, a common grade of hardwood lumber. FIP: female iron pipe. galv.: galvanized, meaning that a zinc coating has been applied to metals such as nails, fencing, and sheet metal for protection against the elements. ga: gauge, typically meaning the diameter of a wire or the thickness of a piece of sheet metal. GFI (also GFCI): ground fault interrupter, or ground fault circuit interrupter, an electrical device that senses a fault in the electrical system and shuts down power to that device. HC: hollow core, a type of door that does not have a solid inner core. hp: horsepower, a rating of the power output of an electric motor. HVAC: heating, ventilating and air conditioning. id: inside diameter, typically referring to a pipe or duct. KD: knocked down, which refers to furniture or other items that are sold in pieces that are ready to assemble. kw, kwh: kilowatt, a unit of electrical measure equal to 1,000 watts; and kilowatt-hour, equal to 1,000 watts of electricity used for one hour, the common measurement for how electricity is sold. MBF: thousand board feet, a unit of measure for the pricing of many wood building materials. MDF: Medium Density Fiberboard, a building material made from wood fiber and resin formed under heat and pressure in sheets, boards, and trim. MIP: male iron pipe. NC, NF: National Fine and National Coarse, two common designations of thread size for nuts, bolts, and other threaded objects. NPT: National Pipe Taper, a standard type of threaded plumbing pipe and fittings. OC: on-center, designating the measurement between the centers of two framing members. od: outside diameter, typically referring to a pipe or duct. OSB: Oriented Strand Board, a building material made from thin strands of wood and resin, formed under heat and pressure into sheets and boards. PET: precision end trimmed, referring to lumber that has been trimmed to a specific length PT: pressure-treated, a chemical treatment applied to lumber as a preservative. PVA: polyvinyl resin adhesive, commonly used as a drywall sealer. PVC: polyvinyl chloride, a widely used plastic composite material. RO: rough opening, a framed opening that is specifically sized to receive a finished item such as a door, window, or skylight. S4S: surfaced four sides, referring to lumber. SC: solid core, a type of door with a solid inner core. SF, SY: square foot and square yard. T&G: tongue and groove, a method of milling interlocking lumber |