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New Home Construction Loans
New home construction loans are often the only viable option for ordinary people to get the custom home built exactly the way the want to build it. Lenders will not issue permanent financing on a home that doesn't already exist, and most home buyers don't have enough cash to finance the construction of a new house. So the best option to get your own custom built home is to get an interim construction loan with a predetermined permanent loan conversion at the end of the construction phase. The following is a simplified list of the key milestones for a new home construction loan:
- Get qualified for the financing.
- Setup the interim construction loan, and make the required down payment. Be sure to get the details of the draw process. This is vital as the general contractor will need to know when to expect the checks.
- Make interest only payments on the construction loan (if allowed by the lender) during the construction phase of the project.
- Draw on the available funds as the work is completed.
- Once construction is finished, setup a closing with the lender to convert the construction loan to permanent financing.
- Close the permanent financing, and make any required payments.
Sounds simple huh? The process is very involved, especially during the construction phase. Lenders may require inspections and other documentation throughout the construction phase. Make no mistake that you will have problems with the general contractor. Even the best contractors will make mistakes during a building project. Set aside time at least once or twice a week to check out the project, and identify anything that may look out of place, or not in line with the plans and specifications.
Choosing a General Contractor
Be sure to choose very wisely when acquiring a general contractor. Many contractors will promise the world, and not deliver. Check references, and again I say, check references. Make sure your contractor is bonded and has insurance. It may also be wise to get builder's risk insurance for the project, as it will guard against natural disasters and other destruction that may occur during the project. Stay in close communication with your contractor throughout the construction phase of the project.
Lastly, get every minute detail from your lender before you even get the interim loan. Know exactly how the draw process will work, what your interest payments will be during construction, and all the rates, payments, down money, etc. for the permanent loan conversion and the paperwork surrounding the process. Don't let anything slip by you, as it can really hurt later!
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