The construction loan is given by a lender to be used for construction, remodeling, materials and labor. The construction loans are paid by a residential mortgage at the end of the construction project. The lender will open what is called “Construction Line”, which will be used for home construction project, to pay for material, labor and supplies. The lenders will pay for each stage of the construction work and the materials, submitted by subcontractors after verifying that the work was actually done, and materials Lenders nominate a special fixed draw schedule incorporated in to each stage of the construction. There may be a penalty for any additional draws requested, that are exceeding the allowed amount. The downside of the construction line is that it has a higher interest rate then regular home loan mortgage.
Residential Mortgage In order to pay for your construction loan you will need to get approved for a residential loan. The residential mortgage is like conventional and non-conventional home loans. Fixed and adjustable rate may be applied. Construction/Perm Loans Some lenders offer both the construction line and residential mortgage as one loan. The Construction/Perm loan is a combined loan made directly by the lender to the borrower. It functions as a construction line for financing the construction of the home, and then it serves as a permanent mortgage by paying off the construction line after you complete the construction project. The benefits of the construction/perm loan are: -Since this is a combined loan, you minimize your closing cost, attorneys and appraisal fee. -Since the approval for construction line depends on the approval of residential loan, you only need to submit documentation to one lender, and deal with one loan only. -The construction loan is tax deductible.
The check list for Home Construction Financing. Start-up Construction Budget A start-up construction budget is a cash budget prior to obtaining your construction financing. Depending on the size of your construction, it is commonly suggested anywhere between $5k and $10k.
Down Payment Down payment is usually 20 percent or more, if required. The down payment includes either equity in an existing home, the cost of land or cash. Make sure to get a true market value for your home.
Planned Budget Focus on staying within your budget, since it is really easy to get carried away when it comes to home remodeling. Documentation Make sure to have all of the required documents verifying your income, employment, savings and investment accounts. The lender will require an estimate costs and the construction project plan