Home Construction Financing
Financing Home Construction
- Home construction lending is a little different
than regular mortgage financing.
- First, you will need a home construction line of
credit that will used to pay subcontractors and suppliers
who perform work and provide supplies.
- Second, at the end of the construction project,
you will use a residential mortgage to pay off the
These are the two parts to home construction financing:
- Home Construction Line
- Residential Mortgage
Home Construction Line
- You will submit for lender approval an application
for a home construction line of credit. You will use
the construction line to pay subcontractors and suppliers
during the construction phase of the project. Generally,
these players require payment within 30-60 days following
- Once each month, or after each stage of the home
construction, your builder will submit a request for
funds to pay for subcontracting work and supplies
that was used during the construction phase.
The lender will release funds after they have verified
that the amount requested will be used for the construction
phase that has been completed.
- Typically, the lender will send out an inspector
to verify that the work has been completed. If passed,
funds will be released to line the next day.
- Lenders normally require scheduled withdrawal amounts
tied to each major phase of the construction. If you
request more draws than allowed per project, you may
be charged a nominal fee per draw.
- Don't underestimate your need for up front cash.
You will normally spend more money during the first
construction phase than what you can withdrawal up
You should maintain a cash reserve account for cost
overruns during a construction phase. See our affiliated
site for more information about using your home equity
as a cash reserve account:
- The construction line generally carries a higher
interest rate than residential home mortgages.
- You will need to apply for a residential mortgage
to pay off the construction line when you finish the
construction project. In most cases, your approval
for a residential mortgage will be required prior
to obtaining the construction line.
- The residential mortgage is like any other single-family
home mortgage loans. These include conventional and
non-conventional loans, fixed, adjustable rates, etc.
We have complete information on residential mortgages
at our affiliate site: PickMyMortgage.com
Construction / Perm Loans
- Some lenders offer both construction lines and residential
mortgages as one loan.
- The Construction/Perm loan is a combined loan made
directly by the lender to the borrower. It functions
as a construction line for financing home construction;
then it serves as a permanent mortgage by paying off
the construction line after you complete the construction
- The Construction/Perm loan has several advantages,
- the borrower can save money by paying for only
one set of closing costs, attorney's fees, appraisal
- since the construction line is contingent upon
approval of residential mortgage, obtaining a
construction/perm loan allows the borrower to
submit and provide documentation for one loan
application and work through one lending institution.
- because the loan is made directly to the homeowner,
the borrower can take full tax advantage of the
interest rate charges.
- The Construction/Perm loan may also carry some
- obtaining the best rate and terms. Some Construction/Perm
loans carry higher than prevailing market rates.
- even though you may be working with one lender,
usually the loan is managed by two separate departments.
You may need to provide duplicate documentation.
- your best option is to shop
around to determine your best options.
set aside a cash budget prior to obtaining your construction
financing. Builders suggest anywhere from $5,000-10,000,
depending on the size and scope of the construction.
This up front expense is considered part of the overall
project cost and is often part of the down payment
or "reimbursed" as part of the construction
generally a minimum of 20% of more. The down payment
may be cash, equitable securities, or the equity in
an existing home or land purchase.
If you are using the equity in an existing home, make
sure you obtained a true market value of your home
and anticipated time to sell your home.
Existing homeowners often use the equity value of
their existing home as required up front money for
construction loans. They may take out a home equity
line of credit to pay the up front money or a percentage
of the estimated construction cost.
For more information about home equity lines: see
our site at YourEquity.Com
know your limits. It can become tempting to add additional
items to the home that place the entire project out-of-budget.
Some buyers setup a budget cushion for upgrades and
See our affiliated site: using your home equity as
a cash reserve account for home construction: click
your submission of an application will require documentation
of income and employment similar to a home mortgage
This will include verification of employment (W-2s,
pay stubs, etc.), or if self-employed, documentation
of income, savings and investment account statements,
In addition, the lender will require construction
specifications and cost breakdown for building your
home. You will also need to provide the purchase contract
or title to the construction site.