Congratulations! You’re ready to start that home project you’ve been dreaming about. The only problem? Funds. Building projects don’t come cheap, especially when done correctly. So how do you finance constructing your home, expanding with an addition, undertaking a bathroom renovation, deck rebuilding or other construction project? Why, with a construction loan!
Here’s what you need to know about this type of specialty loan and what to expect when going through the process.
What is a Construction Loan?
Construction loans are typically short-term loans that cover the costs associated with the process of building or doing work on a home, from start to finish. These loans let homeowners borrow the money needed for the project, from materials to labor, with interest.
At Auburn Savings, we also offer single-close Construction to Permanent 30-, 20-, and 15-year fixed rate loans, with an additional 12 months allotted for the construction phase of your project.
Where to start? Pre-plan
When it comes to Construction Loans, one of the most important things you can do is preplan. Pre-planning ensures for a smooth loan process. To begin, you’ll want to do the following:
- Find a reputable contractor who can help guide you through the process. This step is invaluable, especially if this is your first construction project. There are many potential pitfalls surrounding ordering material, timing and coordination of sub-contractors, and a strong general contractor can take those kinds of headaches away from you.
- Have a general floor plan and budget in mind for your project. Once you do, you can touch base with your contractor who can assess your plan and help to manage expectations before you get started. They will also help to gather a materials list, which will allow you to get estimates for the material you will need. Most contractors give allowances for all the trades based on your taste and overall wants, typically limited by the overall budget broken down by each individual trade.
- Speak with your contractor about any necessary building permits or permit applications you may need in order to begin. You can visit your local town office to get started or your contractor may do it for you.
Secure your financing
Once you have a fairly solid idea of what you want to build and all the projected costs, it’s time to have a conversation with your lender. After setting an appointment, you’ll want to bring these Items with you to your initial meeting:
- Contractor’s name and relevant experience
- All plans, specs and costs
- Personal financial documentation, such as several years of tax returns, bank statements, retirement statements, current mortgage/tax/insurance information
- Any necessary building permits or proof that it is in the works
Start the application process
After you apply and are approved by your lender for your Construction to Permanent Loan, an appraisal will be in order for the “as constructed” project. Based on appraised value you may be able to adjust your loan amount, typically based on keeping your loan amount at 80% or less of the appraised value. The loan moves through the title process and then on to close. The entire process can take 45 days or so depending on how busy title companies and appraisers are.
The construction phase of the loan usually lasts 12 months or less. During this time you are required to pay the interest of the outstanding loan balance each month. As you progress through the project, your contractor needs money to buy materials and pay subcontractors. To do so you will request draws off your construction loan from your lender. After a draw is requested, an inspection may be done to ensure your project is progressing in conjunction with the amount of money being drawn off the account.
Things to keep in mind
Keeping a good working relationship with your lender helps ensure you understand the process and makes for a smooth project. The bank usually “holds back” 10% of the overall funds to help ensure contractors finish the project to completion and so you can obtain an Occupancy Permit from your city or town.
Auburn Savings helps expedite this process by providing direct communication with your lender in order to get your disbursements in a timely manner.
At completion, a final inspection will be done and the 10% holdback is released. After the 12 months of interest-only payments during the building period, your loan will automatically roll into the predetermined permanent financing term you and your lender decided on.