There are two parts to a construction loan.
The first part is temporary financing that you use during the construction phase of your new home. The other part of a construction loan is converting to permanent financing. This is why you will see lenders calling their construction loan program, Construction/Perm Loans. Here is some basic information that you need to know about construction loans.
* Most Construction Loans are interest only during the 1st year. But you only pay interest on the total amount of Draws. So in your 1st month of building, you may not have any draws, your payment is $0. But then in month 2, let's say that your builder requires an initial draw to buy materials for $50,000. Then you will pay interest only on the $50,000.
* With National Bank of Commerce, there is not a set number of draws that you can take. We are flexible with our draws. You simply contact us to request a draw and we send an inspector out to your home to verify that the work completed thus far meets the draw need.
*What if you go over budget? With most lenders this would come out of your pocket. With National Bank of Commerce, we will work with you to try and keep that from happening. If it does happen, then we will work with you to come up with a solution.
* Once you are ready to install cabinets in your new home, then it is time to start the process of modifying your loan into the permanent financing.
* Now that the construction is complete, it is time to convert that temporary financing into a permanent fixed rate mortgage. As long as you are on budget and nothing drastically changes, then this should be a pretty simple process. The lender will need to update your file with current pay stubs and bank statements and a final appraisal. But once that is complete, you should be able to modify that construction loan into permanent financing relatively easy.
Here is an example of how the process should work.
Let's assume that you own a lot and you are ready to build on it.
1. You need to get pre-approved with a lender to ensure that your credit and income meet the parameters to obtain financing.
2. You need to find a builder that you are comfortable with. There are some resources for you to do that. The Madison County Home Builders Association can help.
2. Once you found a builder and have a budget and plans in place, your next step is to secure financing.
3. Go back to the lender that you did the pre-approval with and take them the plans and specs, budget and all of your income documents.
4. Now the process starts. At this point, you are between 2 and 4 weeks from closing on the construction loan. The lender will order an appraisal that is based on the plans and specs. The lender will also send all of this information to an underwriter who will underwrite your credit worthiness, capacity, and the collateral to ensure that you meet the guidelines.
5. Once you close on your construction loan, the lender will set you up an account for you to disburse money from.
6. Now you are ready for the builder to get started. The builder may ask for an initial disbursement to buy materials and pay his workers. After the initial disbursement, the bank will guide you through getting additional disbursements as the work is completed. The bank will inspect the new build to ensure that the build meets the disbursement requirements.
7. During the building process you will need to have a builder's risk insurance policy in place.
If you would like to sit down and talk about a construction loan, Please feel free to contact me.