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New Home Construction Loan
Like other construction loans, a new is to be used as interim financing to complete construction on a home, not permanent financing. But the difference between a construction loan used as a repair project on a house and a new is that a new home carries a lot more risk to the lender than a repair project. Thus, a lender is going to have more stringent rules around a new home construction loan.
The problem you will have with the lender, is that the lender does not offer any construction expertise or help; they require you to either have the abilities/skill set, or to hire a general contractor. Even if you are able to manage the process yourself, you will likely run into problems getting the loan approved under your own name. So the only real option for the typical home buyer is to hire a general contractor.
Getting a General Contractor
The price of hiring a general contractor is more than running the subcontractors yourself, however you are shielded from the building risk. This is the value of the general contractor, as well as the general contractor's expertise in construction management. But getting the right general contractor is the tough part, and you better get several bids, and check as many references as possible before hiring a general contractor. If they ask for significant money up front before even starting construction, be very, very cautious of that particular general contractor.
Higher Interest Rates for Interim New Home Construction Loans
Expect to pay higher rates of interest during the construction phase of the loan. As the risk on a new is much greater to the lender, that will translate into higher rates of interest charged. But not to worry, if you stay on the general contractor, and complete the construction of the home on time (typical home should take around 6-9 months for construction) then the net result in dollars will not make much difference on your payment when you convert to permanent financing, which should be at a lower rate of interest.
Understanding the Draw Process
You will need to work with the lender to find out the details of the draw process. Different lenders can vary greatly on the policies and procedures regarding the release of funds. Some may allow weekly draws, some monthly, and some may even require phases of the work to be completed and inspected before releasing funds.
Once you have been able to hire a general contractor, work with the lender to pay the general contractor as the project progresses, and complete your home, then you will be able to close the permanent financing on the home. Get the details from the lender on how the interim to permanent loan transfer and closing will commence. There could be substantial costs and delays to closing the permanent loan if you are not prepared. Work closely with your lender and ask many questions, even if they seem counter-intuitive. There are no stupid questions on this sort of playing field.
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