The House Construction Loan
The simplest kind of house construction
loan is the combination loan which is really two loans in one.
This kind of loan is also called a roll-over loan, a swing loan,
or a construction bridge loan.
It may have other names in
your area. It provides the funds you need during construction
and converts to a "permanent" loan
when your construction is completed. During construction,
you will make monthly interest only payments on the money you
After construction is completed,
you will begin making payments to cover PITI - principal, interest,
taxes, and insurance.
AMOUNT OF THE
hOUSE CONSTRUCTION LOAN
The first thing you and your lender will
need to determine is the amount of your new home construction
loan. You "sort
of" discovered what that amount should be when you put
together your budget and pre-qualified for your financing.
you have completed your Cost Estimate, you know precisely
what you will need. The banker will still have to process
your figures and scrutinize your plans.
BASED ON THE APPRAISED VALUE
The actual amount of the residential
construction loan will be based on the appraised value of the
home (including the lot). The bank will probably use its own
appraiser in determining this value.
Until the last few years,
bank appraisers were notoriously “conservative.” That
means that they assign the lowest possibly value to the proposed
project. Remember, they want you to have a healthy stake in
the project to make their investment safer.
USING YOUR APPRAISER
If the bank will agree to using your appraisal,
you may be able to get a larger house construction loan by shopping
around for a more liberal appraiser. The way to find one is by
You can’t just call up appraisers
and ask them if they’re
liberal or conservative. They all just think of themselves
as “fair.” Other
builders and real estate brokers can tell you who the most
liberal appraisers are.
However, after the housing bust
of 2007-2008, lenders have clamped down on appraisals
that are too generously in favor of the borrower. If
you are getting an FHA construction loan, be assured that
the government will use their own appraisers!
On a house construction loan, banks usually
lend 75 to 80% of the appraised value of the home. If you own
the lot, and it is worth 20% of the total package, you’re
in good shape.
That’s your “down payment.” The
bank will lend you the other 80%, which includes enough to build
the home and pay yourself the builders profit. Since this is more
than you need to actually pay for the construction costs, you
can either borrow less, or you can repay yourself for the cost
of the lot and not have any of your own money in the home.
COST OF THE HOUSE
There are several costs to you to obtain a house construction
loan, which we include under the following two categories.
You have already addressed the different
aspects of the cost of a house construction loan when
you did your cost estimate. By way of review, we will mention
here that there are up-front costs associated with the house
construction loan, which are in addition to the interest you
will pay on the money you borrow.
These closing costs involve
the legal and administrative fees, recording fee, and loan
fees or “points” that the
bank charges to increase its yield.
As mentioned above, interest is charged for house construction
loans based on the outstanding balance owed, at a rate which
is usually one or two points over the prime rate.
If you have trouble getting the loan you
require, you may consider several alternatives. If your problem
is a weak financial statement, you may get a parent or friend
to co-sign the note.
If you cannot seem to overcome your lack
of experience, you could try teaming up with an established
builder to get the job done. His agreement to help keep you
on track may be all the bank needs to clinch the deal. Or, you
could actually get the house construction loan in the builder’s
You could also use his credit with suppliers
to purchase materials. You would probably want to pay the builder
a negotiated fee for the use of his good credit - say $500 or
$1,000. It would probably be best to set up a separate partnership
rather than run this through his regular business.
his profit picture may be adversely affected ($1,000 profit
on $80,000 gross income is pretty low).
Hopefully, you won’t have this problem
- especially because of a lack of experience. If one bank turns
you down, try another, and another. Be persistent.
FINDING THE PERFECT HOUSE CONSTRUCTION LOAN
OK, now you know a little about residential construction loans.
The next step is getting one, right? Well, that's another subject!
Click here to
get you started.
For additional information on Construction Loans,
see Lesson Twelve of our online course
Successful Home Contracting.
to the Home Building Answers' Home Page
from House Construction Loan