Many
people
prefer to
custom-design
their own
home,
perhaps
because it's
too
difficult to
find a home
that meets
all their
needs or
because they
want a
brand-new
home. A
construction
loan is a
loan that
finances the
building of
that new
home.
Construction
loans are
different
from your
standardized
mortgages
usually
underwritten
by Fannie
Mae and
Freddie Mac.
They are
different
because the
lender has
to know the
"story"
behind the
planned
construction
before it
will be
willing to
lend money
to the
borrower.
They also
don't pay
out all at
once.
Borrowers
usually get
between five
and 10 draws
which
coincide
with certain
stages of
construction
such as:
-
Pouring
the
foundation
-
Framing
-
Installing
heating
and
cooling
systems,
wiring,
and
plumbing
systems
-
Installing
cabinets,
flooring
and
fixtures
-
Finishing
work
(painting,
carpeting,
etc.)
Construction-Only
Construction
loans are
usually
short-term
and are
converted or
replaced by
a standard
mortgage
once
construction
is finished.
Some people
get a
"construction-only"
loan in
which only
the building
of the home
is financed.
They then
have the
choice to
shop around
for another
lender
and/or a
lower rate
once the
home is
occupied.
Construction-to-Permanent
Others
prefer to
simply get a
"construction-to-permanent"
loan in
which their
construction
loan is
converted
into a
standard
loan by the
same lender,
once the
borrower has
a
certificate
of
occupancy.
This saves
time and
money since
the borrower
only has to
fill out one
mortgage
application
and close
once. The
type of
mortgage the
construction
loan is
converted to
is decided
on at close.
Rate
Lock
Some
lenders
allow you to
lock in your
mortgage
rate for up
to 12 months
during
construction.
This is an
advantage
because you
avoid the
risk of
rising
rates.
However,
some lenders
offer a
float-down
option which
allows the
borrower to
take
advantage of
rate dips.
How
Much Can You
Afford?
To find
out how much
you can
afford to
borrow, you
must figure
out first
what it will
cost to
build. Think
about how
much it
costs to
design and
build the
home; how
the build
site affects
cost (i.e.:
if the site
is on a
steep hill,
it may be a
financial
nightmare to
install the
septic
system); and
other such
issues.
Once
you've
estimated
the cost of
construction,
it's a good
idea to find
out how much
you qualify
to borrow.
Most lenders
will offer
you a
pre-qualification
which will
give you an
idea of how
much you can
borrow.
However,
this is not
a guarantee
since the
lender
hasn't
verified any
of your
information
or committed
to the loan
amount.
It may be
better to
get an
actual
approval.
You'll know
exactly how
much you can
spend and
whether you
can afford
to build the
home as
planned or
not.
If you're
planning on
building a
custom home,
find out how
much you can
afford and
whether your
plans fit
within that
budget.
Also,
consider
whether you
want to shop
around for
another
mortgage
once
construction
is complete
or whether
you'd rather
save
yourself the
trouble by
converting
your
construction
loan into a
standard
mortgage