One quick call should do it. You'll just go to your banker and because of your great relationship, she'll set you up with the construction loan you need to build your home. Now, where's that “easy button”?
Okay, maybe you do not think it will be that easy but sure it can not be all that worrisome, right? The construction loan is a unique animal. Not many lenders are adept at it and many lenders will not even touch it. It takes some real experience and good management for a lender to control it and make a profit.
Just What Is a Construction Loan?
The home construction loan funds your home building project. It's viewed as a risky proposition by the lender. They are being asked to fund a promise. All loans are a promise to pay, yes, but a construction loan is a promise to pay without much collateral. There is no home there to repossess if it is not completed. Not something all banks are eager to participate in.
These loans can be profitable for lenders but they must reduce their risk as much as possible before they commit. It's this risk reduction that makes them seem so picky about their qualification standards.
Here's what you should be asking your lender before you plow ahead with your homebuilding plans. Their answers will enlighten you about their requirements.
- Will they accept you as an Owner Builder or require a licensed contractor?
Be sure that your banker knows what your goal is. Are you a true owner builder? Will you be hiring a General Contractor? What is their policy on owner involvement?
- Does your bank screen the contractors for approval?
Many banks and other lenders will have the last word on the builder or General Contractor you use. Others that allow Owner Builder programs will likely require a Home Building Coach. How do they approve them?
- What kind of equity does the bank require you to have first?
Will your land need to be free and clear of any loans or encumbrances? Will you be required to put additional cash into the project?
- Do they use a “builder's control” system for paying bills?
How is the money disbursed through your home building project? Will you be in charge of the money paid out? What will the paperwork be like? How much will this cost to administrator?
- Will you be required to make construction loan payments?
If you do not make loan payments on your construction loan along the way, how much interest reserve will you need to include in the loan?
- How many months is the construction loan term?
Home building construction loans are typically very short term loans. They range for six to 12 months on average. What is their policy if you end up needing more time?
- Will the loan automatically roll over into a 30 year mortgage?
You can see from this that it's important to start this conversation early. There are many hoops to jump through and it's an ongoing process. You may not be able to proceed exactly the way you envisioned.
Finally, getting a loan to build your dream is just part of the reality of getting it done. My advise is to go with the flow and provide your banker with what she needs. She wants to get it done too! Just be sure to communicate well. Ask questions and understand the reasons for the requirements. It'll make life easier for you. Even if you're operating without that phantom “button.”