We have decided to build a home. How do we get a Construction to Perm Loan?
The great thing about building a home is you can control what you want in a home within budget. Here are the basics of getting financing for your home building project:
- Before you begin, read this article: “The Seven Most Common Mistakes People Make when Building a House” Building a custom home is not for the meek. Unless you have built multiple homes, apprenticed under a builder or have worked in the building trades, you will encounter many new problems that you did not anticipate.
- You will need to have chosen and secured your land for building. Of course, determine if the land will support the size and type home you want to build. You may choose to pay cash for the land or finance it.
- Get your plans and specs for the home.
- Hire a builder.(see item 1 above, unless your a builder, acting as the general contractor is not advised)
- Develop an accurate realistic budget for the project. What will it cost you to build the home? I see few custom homes come in under budget. This is why it is important that you have extra funds available for cost overruns.
- Obtain a prequalification from a Mortgage Broker that qualifies you for the permanent loan after you have completed building your home. You will need the prequalification for the Bank that will do the Construction loan. The bank doing the construction loan does not want to hold a 30 year fixed mortgage and most construction loans have a payoff term of 12 months.
- Find a local Bank to do the construction loan on your home. I say local bank because they know the market and do more construction loans than the big national banks.
- The Bank doing the loan will work with you to get an appraisal done on the home based on the plans, specs, cost estimate, and land value. This is where the numbers really come together. If the appraisal works out, you are ready to get your loan.
- The Bank will do the Construction loan and secure it with the land you own, paying off any loan you may have on the land.
- You will not get all the funds at once. The funds are given in Draws based on the level of completion of construction.
- Once construction is completed, and you obtain your Certificate of Occupancy, You are ready to do the permanent part of your financing.
- Permanent financing is basically a refinance paying off the construction loan. Another appraisal is obtained to insure value.
Sounds simple right? As long as the numbers work out on the Appraisal and cost overruns are contained, We generally do not have any issues.
Managing Partner, Options Mortgage Services