Construction Loan Process
Over the past week I have been exchanging emails and meeting with a couple different lenders about financing the construction of the Starter Home 2.0 project. While I had previous experience with designing and building new homes, financing has been more of a learning exercise. Here is a breakdown of the steps involved in the loan process from an owner's perspective.
- Identify local banks willing and able to provide new home construction loans. My experience is that the big national banks either are not interested, or have much higher rates and fees than local banks.
- Submit personal financial information to the banks with recent W-2's, pay stubs, bank statements, etc. to determine how much home you can afford and at what rates based on your credit history.
- Submit information about the proposed building project, including plans, specifications, a signed contract with the builder of the house (if that exists), and information regarding the land the project will be built on.
- Identify the basic terms of the loan with regards to construction and permanent financing, whether it is a 30-year or 15-year mortgage, an adjustable or fixed rate, and timing of potential conversions from one type of loan to another.
- Complete the forms necessary for the bank to start putting together the loan package, which will include a pre-appraisal of the plans and specs to determine what the home will be worth once the project is complete, which will affect the amount the bank is willing to lend.
- Finalize the terms of the loan with regards to closing costs, escrow, taxes and insurance, and execute the agreements.
Up to this point I have only completed steps 1-5 in the loan process, so I'm sure I will need to clarify step 6 and maybe add a few more steps as things move along. Stay tuned for more blog posts on the subject.
