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 have borrowed.
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.
If 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 reputation.
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!
100% FINANCING
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.
There are several costs to you to obtain a house construction loan, which we include under the following two categories.
ORIGINATION COSTS
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.
INTEREST
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.
GETTING HELP
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 name.
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.
Otherwise 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.
