What are the ins and outs of getting a construction loan to build a home?

amyann16: What are the ins and outs of getting a construction loan to build a home?
My husband and I are 1st time homebuyers. We have been preapproved for a house loan, but are not having luck finding what we want. We have toyed with the idea of building our own. What are the differences between getting a preapproved loan and buying a already built house and going through getting a construction loan? Do you have to put money up front for a construction loan? Do you make mortgage payments while the house is being built, or do you wait until the house is completed? Is there a time frame that the house must be built within? If we were preapproved for a certain amount with a homebuyers loan, would we likely be preapproved for the same amount for a construction loan? What other differences should I know about? Since we are first time homebuyers we do not have much collateral (we do have some savings, but not a ton), would that affect our ability to get a construction loan?

Answers and Views:

Answer by Stephen I
First you should get a price from your contractor and have plans drawn up for the house you want. You will be paying a lot more interest for a construction loan. You will make payments out of escrow while your house is being built. You put money down and then make payments until the construction is finished. It would be best not to start building until spring. It will have to be above freezing if you plan to use concrete. You also don’t want major problems such as mold which is caused due to wet weather. Make sure your contractor uses reputable workers that have some skills. Much construction is done on the cheap and the homebuyer ultimately ends up paying a higher price. Also, get a deal. Since the market is soft it would be a good time to get a lot of upgrades and landscaping as well. Good luck.

Answer by Rico
No, you are not automatically approved for a construction loan, it’s a different animal. To get a construction loan you need to already own the property and have alot of equity.

The “ins” are that the bank loans you a large amount of money for a short term to build your house. The “outs” are that you have to replace the construction loan with long term permanent financing once the home is built and you don’t know what the rate will be when that happens so you are under the gun to finish as soon as possible.

Building is risking and not for 1st timers unless you have lots of cash to gamble. If you want to try it, buy an older house at a good price, fix it up and sell it. Then you will know what you are in for.

Answer by mazziatplay
Your pre-approaval only applies to the loan type you requested. If you change loan types you must be pre-approved again fot that specific loan type.

The most favorable option for you is called a “Construction/Premanent” or “One Step” loan.

This loan combines both the construction loan and the permanent loan in one package so that you are not paying two sets of loan fees. Not all lenders offer this option so you may have to shop for it. If you will let me know which state you are in I can help you find a lender who offers this program.

Your minimum down payment will be 5% of the sales price of the land and proposed construction costs combined. In addition, the lender will require you have sufficient funds for closing costs and, some lenders may require you have a reserve fund sufficient to cover any overruns or upgrades. This reserve fun does not have to be liquid. It could be your 401K. Some lenders will allow you to finance the estimated 5% reserve requirement if you put down a 10% downpayment.

The loan works like this:

The appraisal is completed using plans and specs to determine completed value.

Your builder supplies materials specifications and a construction/draw schedule.

The draws against the loan are given to the builder based either on percentage of completion or on a line item basis. Most lenders make the draw checks jointly payable to you and the builder so that you may maintain some control.

You pay interest only payments on the funds as they are disbursed to the builder at whatever rate the construction term is set for.

At the end of construction the loan converts to a permanent loan. This process will vary a bit from lender to lender. Some convert you at the same rate as your construction loan, some offfer you a float down option, lots of vartiety here.

The normal construction term will range from 6 months to a year or longer on a big project.

Good luck.