QandAs: Loans

I want to build a Home, do I get a Mortgage now or when the Home is completed?

Answer:
When you’re building a home, it's

likely that you'll need to get a construction loan to finance the actual construction of the property and a mortgage loan once the building phase is completed. Construction loans are short-term financing agreements designed to provide individuals with the funds they need to undertake construction of a new home.

With a construction loan, funds are disbursed to the home buyer and contractor based on the progress of construction. Most construction loans allow individuals to make interest-only payments on funds that have been disbursed during the loan's term, and the loan becomes fully due and payable at a pre-specified point in time or upon completion of the construction. Construction loan payoff is generally funded with a mortgage loan, which you will take out once the house is complete.

Most mortgage lenders issue a Construction to Perm mortgage loan. This is a construction loan that is then rolled over into a conventional mortgage once the home is complete.

Depending on the size of your mortgage, most mortgage lenders will require you close and before you break ground. So if the lender requires a down payment you'll have to pay that before the home is complete. This is difficult to grasp for some of us. Most of us would like to use the proceeds from the sale of our current home to put down on the new home.

With most build jobs, you'll likely have to put that money down at closing so either you sell your home and use the proceeds and live in an apartment during the build or you take out a home equity loan on the equity of your current home to pay for the down payment. Of course now your paying your current mortgage plus a home equity loan. If your home takes a year to build you could be stuck paying two mortgages for a year.

You most likely won't need to make payments on the interest only construction loan as the builder can often times role that into the perm or conventional loan at the end. Again, most of the time builders will role real estate fees and land fees into the perm loan as well.

So here are the loan steps to building a custom home:

Step 1: Get approved for a Construction to Perm Loan
Step 2: Close before ground breaking and make down payment
Step 3: Builder draws from construction loan to build home
Step 4: Interest is accrued only on the amount the builder borrows. (if the builder borrows $50,000 this month you pay interest only on $50,000. If next month they borrow $100,000 you'll pay interest only on $150,000).
Step 5: Interest only payments are usually rolled into your Conventional loan.
Step 6: Home is finished, role construction interest only loan into a permanent mortgage loan. (Most lenders will give you the option to lock in at closing with the option to lock in when the construction loan is converted into a permanent).

Building a home is a great reward. Be sure to ask your mortgage lender and builder plenty of questions.


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