If you’re planning on building a new dwelling as your first home and financing the move through the bank, a standard mortgage just won’t cut it. Mortgages are designed to provide resources to a homeowner in exchange for collateral—the property—but with a home yet to be constructed, the risk to the bank is much higher.
For this reason, banks prefer to issue special debts known as construction loans to finance the building of a new home as well as establish a relationship for a mortgage later down the line. While these are traditionally two separate loans in a technical sense, banks will often roll the outstanding debt from a construction loan directly into a mortgage arrangement, and have even begun to package the two products directly in recent years for convenience on both ends.
The Basics
Obtaining a construction loan starts with appearing before bank officials to outline your construction plan and detail the legitimacy of your case by providing a realistic budget and time frame. Banks are already averse to providing loans with limited collateral, and so prospective homeowners have a much better chance of obtaining funding from a bank with which they have a lengthy banking history. Depending on where you live, you may be eligible for the Homestart first home owners grant, it’s always worth checking.
If approved, these loans have a number of special guidelines designed to protect the bank’s investment. These typically include a short one year turnaround time to ensure speedy repayment and variable rates that fluctuate based on market conditions. They also require your construction project be carefully monitored to make sure everything is going to plan.
Repayment
Once the funding is secured from the bank, the borrower is placed on an automatic draw schedule designed to reflect the planned project construction stages. These bank drafts are primarily to address the ongoing interest of the construction loan whole payment is still in progress, with the principal of the loan either due in full at the time of loan expiration or rolled into a construction-to-permanent mortgage as part of a predetermined arrangement.
Construction-To-Permanent Mortgage
When the project is completed, which is determined by the issuance of a certificate of occupancy for the completed home as well as the payment of the construction contractors, the balance of the construction loan can then be applied to a traditional mortgage arrangement. After the closing costs on the home are paid, payments on the mortgage immediately begin coming due and the new residents can begin their journey to becoming full homeowners.
Financing for home construction can be difficult to obtain for many interested parties, but a sufficient income level or a strong banking relationship can greatly increase the chances of approval. Home construction financing is more than a mortgage; it’s an opportunity for more deserving individuals to experience the American dream.
With a construction loan, the bank also obtains lien waivers from the sub-contractors. This is essential when you are converting the construction loan to a mortgage. We are building this year and it is really nice that the builder/developer has his financing through the same bank as we do, so the bank has a vested interest in approving the loan for us. Two customers and two payment streams for the bank.