The Ins and Outs of Construction Loans

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Published on September 28, 2010 with No Comments

The ins and outs of construction loans
In recent years, many people have opted to build their own home instead of buying an existing home in order to get exactly what they want and take advantage of attractive pricing. If you are considering building a new home, learning the basics of construction loans can be helpful.

First, potential homeowners should choose a builder and possibly even an architect to finalize the design of the home. It is recommended that homeowners talk to at least two or three different builders as well as obtain client referrals. This is typically the biggest investment a person will make over their lifetime, so it really pays to do your homework before signing any contracts.

Once the decision to proceed with the project has been made, the homeowner must secure funding. At the time of application, a borrower should provide the budget, plans and specifications for the new home to the bank. Using these plans, an appraiser will determine how much the home will be worth once it is built.

A construction loan is actually a line of credit that is tapped as the funds are needed. This is advantageous because interest is charged only on the outstanding amount owed, not the maximum credit line. In addition, borrowers may have to pay a construction loan fee to the bank ranging from 0.5 percent to 1 percent of the entire loan amount as well as additional fees that vary by bank.

The bank will commonly lend up to 80 percent of the appraised value, or the cost of the home and land, whichever is lower. Borrowers typically need to demonstrate the ability to contribute at least 20 percent of the cost of the home and land, plus closing costs.

As anyone who has ever gone through this process before knows, it is also important to have an extra reserve of cash for any unforeseen changes to the cost of the home. If you already own the land, this counts as equity and it can be included as part of the down payment. The bank will expect the borrower’s equity to be exhausted first and will make sure there are always sufficient funds available to finish the home.

Your builder will normally request to be paid about once per month during the construction process. When requesting an advance, the builder must submit a sworn construction statement detailing how much was paid previously, the amount of the funds currently requested, and how much will be needed to complete the project. An appraiser will then visit the site to verify that the work for which the funds have been requested has already been completed.
Upon receiving verification from the appraiser, the bank will forward funds to the title company. The title company will verify that there are no liens on the property by requiring a lien waiver from all contractors who have provided services or materials for the construction to date.

For example, if the general contractor has not paid the subcontractor who provided the concrete for the foundation, the concrete subcontractor might place a lien upon the property until payment is received. Any outstanding liens must be addressed prior to additional funds being disbursed.

Once the home is completed and the certificate of occupancy is obtained, borrowers are ready to convert from their construction loan to a long-term mortgage. Homeowners can apply for an end loan 1 to 2 months before the completion of the project in order to be ready once the home is finished.
If a construction loan is in your future, Peoples Bank offers a variety of construction and mortgage loan products. For more information, call 219-462-4100, or visit www.ibankpeoples.com.


This article was submitted by Peoples Bank.


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