How exciting to be building your very own custom home! Now is your opportunity to create a sanctuary you can enjoy for many years to come. A construction loan is an important step in making your dream come true.
What is a Construction Loan?
A construction loan is a short-term loan that provides funds to build a residential property. Unlike a traditional mortgage, borrowers make interest-only payments during the construction phase. These loans are usually one year or less in duration during which time the home must be built and a certificate of occupancy issued. Plus, rather than lending the entire balance at one time, a construction loan disburses money incrementally to the borrower as building progresses.
What a Construction Loan Covers:
A construction loan can be used to cover the cost of the land, contractor labor, building materials, and permits. It can also be used to cover permanent fixtures like appliances and landscaping.
It’s common that construction loans will include a contingency reserve to cover unexpected costs that could arise during construction. This reserve fund can sometimes be used to cover upgrades such as nicer cabinets or countertops, but you will need to check with your builder to find out how the ”change orders” will be handled, as, those that are most costly, are generally paid by the borrower outside of the construction loan.
Loan Interest Rates:
Construction loan rates are typically higher than traditional mortgage loan rates due to a higher risk factor. With a traditional mortgage your home acts as collateral. With a home construction loan the lender doesn’t have that option so they tend to view these loans as having a higher risk.
Lender Requirements:
Lenders require a construction timeline, detailed architectural plans, a realistic budget, and a builder contract. They also ask for similar documents that are required for a mortgage loan including but not limited to a credit report, bank statements, and various proof of income documents.
Draw Schedule:
The draw schedule is a detailed payment plan for a construction project that follows the project’s construction stages. If a bank is financing the project, the draw schedule determines when the bank will disburse funds to the contractor. The goal is to make progress payments to the contractor as work is completed. The lender will have an appraiser or inspector check the house during each stage of construction and, if approved, the lender makes the payment to the contractor, known as draws. Expect to have between four and six inspections to monitor the progress.
One-Time Close Loan:
Construction-to-permanent loans, sometimes called “single-close” or “one-time close loans”, provide the funds to build the dwelling, and once the house is complete, the loan is converted to a permanent mortgage. The benefit of the one-time close loan approach is that you have only one set of closing costs to pay, reducing your overall fees.
Once the construction-to-permanent shift happens, the loan becomes a traditional mortgage, typically with a loan term of 15 to 30 years. After this shift you will make payments that cover both interest and the principal. At that time, you can opt for a fixed-rate or adjustable-rate mortgage. Your other options include an FHA construction-to-permanent loan — with less-stringent approval standards that can be especially helpful for some borrowers — or a VA construction loan if you’re an eligible veteran.
Two-Time Close Loan:
These loans may be more costly because you complete two separate loan transactions and pay two sets of fees. Another consideration is that you would be subject to the mortgage rates at the end of the construction process.
Construction-Only Loan:
Just as they sound, a construction-only loan is for the sole purpose of building a residential property.
CONSTRUCTION LOAN CONTACTS:
Flagstar Bank
Loan Thanh Phan, Senior Mortgage Loan Officer, NMLS # 595174
Cell (505) 504-6862
6745 Academy Rd NE Suite B, Albuquerque, NM 87109
US Bank
Juanita M Kilijanski, Mortgage Loan Originator, NMLS# 246112 Phone (505) 922-2842
juanita.kilijanski@usbank.com 7900 Jefferson St NE, Albuquerque, NM 87109
New Mexico Bank and Trust
Diana Lucero, VP Construction Lending, NMLS#539895
505-830-8103 // 505-830-8313
3002 Louisiana Blvd. NE, Albuquerque, NM 87109
Mountain America Credit Union
Bri Saley, Loan Officer
(801) 325-1920
Various offices in Albuquerque. The corporate office is in Utah
LOT LOAN CONTACTS:
Lot loans can be great if you’re not planning to build right away.
New Mexico Bank and Trust – Lot Loans
Amy Armstrong, Senior Personal Banker
(505) 830-8300
7021 Jefferson Street NE, Albuquerque, NM 87109
Lot Loan Terms:
20% down at closing
5-year loan, amortized at 20 years
Call for current interest rate information
Mountain America Credit Union
Bri Saley, Loan Officer
(801) 325-1920
Lot Loan Terms:
15-20% down at closing
10-year term with a 10-year amortization
7-year term with a 20-year amortization and a balloon payment at year 7
Call for current interest rate information
Seller Financing at Diamond Tail
Please call Brenda at the Diamond Tail Sales Office (505) 492-2015 to learn more about Seller Financing.
References:
https://time.com/nextadvisor/mortgages/home-construction-loans/