Eric Babin, President, Babin Custom Builders
Constructing a new custom home is easier said than done. If you already have land, things will be much easier but where do you get the necessary financing to purchase materials and complete construction. Below are some tips which are layout as a guide to help you find construction financing in the least time possible and without making frustrating mistakes.
The first thing you need to do is find both a lender and a contractor. You might wonder why a contractor is necessary at this stage but remember money will only be disbursed after a construction schedule has been agreed upon by the homeowner to be (you), the contractor and the lender. Money will be released in several disbursements where each one of them will go to the completion of a particular phase. After the lender verifies that the contractor and homeowner have completed building a phase, they will then release money for the next phase.
While shopping, bear it in mind that there are two types of construction loans. You can either go for a construction-only loan which is sometimes referred to as a construction line of credit or the all-in-one variant. With a construction-only loan, the entire amount disbursed during construction becomes due and will be converted into a conventional mortgage or it can be replaced with a take-out-loan. Construction-only loans are flexible in that the amount you borrowed initially can be increased while the construction project is in progress. However, picking the option presents two major drawbacks. There will be two sets of closing costs and not to forget that interest for construction-only loans tend to be higher.
The all-in-one loan which is also referred to as a roll-over loan or a combination works in the same way as a construction-only loan only that when construction is completed, the loan automatically rolls over into a mortgage. Advantages of opting for this variant include one set of closing costs, less paperwork and fixed interest rates. However, it is not possible to increase the initial amount you borrowed when your project is underway; if the money needed to complete construction exceeds your initial budget, you might end up digging into your pocket or borrowing another loan.
Finding a lender should not be hard although you should be very careful with the options they present. Just to help you get prepared for what they might ask for, you need to make sure that your credit report is healthy. The lender might then ask for the necessary financial documents which will be needed to calculate your ability to pay back. To ease things and avoid wasting time, make sure you have all your recent financial documents with you before you even start shopping for a loan. Below is a list of the most essential:
– Recent paystubs, W2s and your tax returns for the past three years
– Saving statements, IRA statements and your investment portfolio.
– A comprehensive budget of the house you want to build complete with a list of materials and their estimated prices.
– A plan for your custom house
– Legal deeds or a sales contract for the proposed construction site.
Construction financing while difficult to obtain will be easier using these strategies.
