It’s never too early to investigate your financing options. As you begin researching construction loans, make sure your construction lender is very experienced. Similar to choosing your builder, you want someone you both trust and have built a good rapport. And because construction financing is more complex, you can uncover opportunities if you have the right people and resources to guide you.

 

Here’s some questions I’m frequently asked about construction financing:

 

How much down payment is required?

Generally speaking, construction loans require a larger down payment than a purchase, but the equity in your lot or the equity in the whole project can count towards your down payment.

 

How do Construction Loans work?

Typically, one would finance the lot, then the construction, ending with the construction loan being paid off by the permanent mortgage. Therefore, it's logical for the permanent lender to take the lead in the transaction so the borrower only has to apply one time.

 

Can I go to my bank for a construction loan?

Possibly. After the real estate crisis of 2008, the "mega banks" got out of offering construction lending. Now it is mostly smaller banks that offer them.

 

Does the borrower control the draw?

Yes! Your builder will submit draw requests for your signature. The lender will inspect to ensure what is being requested has been completed.

 

Can I finance change orders that exceed my original budget?

Yes, in certain circumstances you can finance changes that occur during construction.

 

What information will the construction lender want?

After establishing a budget, they will need information on the lot, your income, assets and credit. If you start by getting your permanent mortgage approved, your mortgage lender can give all that to the construction lender.

 

Can I lock in an interest rate?

There are long term rate locks available.

 

What can I do to make the process smoother?

·         Set up your accounts so you can retrieve information electronically. It saves a lot of time when you can email financial records, such as bank statements and paystubs.

·         Check your credit score early in the process. A higher score can secure you with a lower rate, and there may be some simple ways to raise your score further.

·         Start your construction financing with a mortgage professional who will provide permanent financing at the end. You’ll only have to work with one lender (versus two or more) and only have to apply once!

 

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