Construction Loan & Custom Homes

[jchokie79]

Hi, new to the board here.  DH and I are looking into building a custom home and would like to learn more about construction loans.  

Those of you that have gotten one or have been through the custom home building process.  I would love to hear about your experience and your dos and don'ts.  We built our current home 8 years ago with a builder that was more cookie cutter so we're new to the custom process.  TIA!

[whiskeytails]

I'm also curious to hear experiences. I've spoke with some lenders and we've been making plans with a builder, but we haven't signed anything yet.

[shortnsassy]

While, alas, I don't have yet have guidance for you. I was JUST talking to my lender about a home loan with a construction loan yesterday. Although mine would be for purchasing an existing house that needs major work.

Here is the irony. I spoke to a different loan officer...but from the same bank...three years ago about doing this and he was completely, "No, no way. We don't really do those and you have to have outstanding credit to even be considered." My current loan officer, who I got a HELOC with last year, was like a 180. She suggested I consider a home loan with a construction loan, if I find a great deal that would provide good equity once fixed up. And my credit score is about the same as it was last time. Go figure!

[humpforfree]

mcfelix ?

[mcfelix]

Thanks for tagging me humpforfree.

We had our home built (by the company I work for) last year and used construction perm financing. If you currently own a home, and want to stay there while the new home is built, you need to qualify to carry both loans at the same time.

For the construction perm, it is very important that you factor in all elements of the home upfront. The bank has to have the home appraised on the plans and specs, so you need to provide as much detail as possible to get the value up. And you want the contract price to include as much as possible. Which is really impossible because there will always be things you decide to add along the way that are outside of your initial budget.

During the construction process, you make monthly payments that are interest only, based on how much money has been given to your builder. The bank sets up draws at certain points of construction, for example after the foundation is in. They send the money to your builder and then that month, your payment is the interest based on the total amount of draws that have been sent to your builder. So every month, your interest payment increases. Then when the house is done and the builder has the use and occupancy permit (or whatever it's called where you live) the bank will either convert your loan to a mortgage or you will refinance to a permanent mortgage (depends on the bank and how you set it up with them in the first place).

Hope this helps - feel free to ask more questions. I deal with these on a daily basis, so I'm happy to answer what I can!

[humpforfree]

mcfelix awesome. I thought your new house and/or your job might have an idea

[jchokie79]

mcfelix, thank you so much for the info!

We met with the builders last week and are meeting with the loan officer next week. We do plan on staying in our current home until the new one is built (putting it on the market this summer).

What's the general required down payment for a construction loan? I've read 20-25%. What are the risks involved with a construction loan? Is there an estimated percentage we need to figure in with the price of the home for the extras? Anything we should be aware of with the construction loan?

Also as far as building a custom goes, if there's theft or material damage, who is responsible for the replacement costs? We built our current home with a cookie cutter builder and they were responsible for replacements during construction.

Lastly, thank you in advance!

[mcfelix]

Happy I can help jchokie79!

Down payment really depends on the bank and program. I've seen some with as little as 10% down, but 20% is more typical. I don't really consider the loan itself risky - the risk is more with the builder, and making sure they will do what they say in a timely manner.

How many details have you gone through with your builder? Do you have a budget for each category of your selections, so you know how much you have to spend and stay within your budget? This process varies WILDLY by builder, so it hard to say without knowing what details you've discussed with your builder. Do they guide you through the selection process, or do they just tell you to let them know when you've picked items?

If there is theft or material damage, your builder should have insurance to cover that. Confirm that they do. Your lender and/or builder should require that you, as the LAND owner, purchase builders' risk insurance for the construction period. This protects you, in the event someone hurts themselves on your property during the course of construction. But you should not be responsible for theft or damage during construction.

As far as the loan, make sure you understand the costs of your loan and that they have spelled everything out up front. For example, you have the pay for the inspector to come out to make sure the builder has completed each stage of construction before they send out the draw. Those fees should be paid upfront in your closing costs. Same with the appraisal. Make sure you know what happens when your loan converts to a permanent mortgage. Will your bank require a second closing, with additional closing costs?

Hmm what else... I would stress that the biggest thing is knowing your budget and ensuring that it is appropriate for what you want to build. For example, you don't want to know that you have $5,000 in your appliance budget when you mentioned you wanted a Viking Range and Sub-Zero fridge, so you really are going to spend $30k or more on appliances.

Anyway, don't hesitate to ask more questions. it's quite a process!

[jchokie79]

mcfelix, I sent you a PM. Thanks!

[mcfelix]

Mar 6, 2015 9:30:21 GMT -5 jchokie79 said:

mcfelix, I sent you a PM. Thanks!

Sorry I haven't had time to respond - crazy day today, but will have time tomorrow!