Financing Your Home Building Dreams— Unless you have all the cash you need, building a home will require some type of financing. In most cases, this financing is referred to as a construction loan. And banks can play a big role for you.
Construction loans are short-term loans. They typically span only several months up to one year. They act as a bridge loan to complete your home until you’ve finished construction at which time they are paid off by replacing them with a regular home loan (usually a typical 30-year mortgage.)
Your Local Banker is an Ideal Source of Funds
Ask your banker first. If you have an established relationship with your banker, very often something can be arranged for you to fund your home building project. Your banker, however, may not be set up to offer construction loans so you’ll need to approach him with this question before you go too far in your planning. Never assume, always ask.
If he cannot do it, he very well may know of another local bank which can help you. Bankers are in the business of loaning money. That’s how they earn their keep! Making wise and profitable loans is what keeps them in business. Yet, a construction loan is a special animal. On the one hand, the loan is a good one because it’s dealing with real estate and real estate, over the years, has proven to be excellent collateral.
On the other hand, if the lender is not experienced with construction loans, they may not want to take it on. There is a lot of extra time, effort, and paperwork involved with a construction loan that not only costs more to prepare and administer but can also be confusing, creating potential problems that can eat away at the banker’s profits.
If the banker is experienced and eager to work with you, it might just be your best and least expensive choice for a construction loan. Over the years in the home-building business, I’ve been through a lot of situations. Let me recount some of the questions I’ve received.
The answers should help you:
Q: What is involved in the qualification process when applying for a construction loan with a bank?
A: There is a lot more involved when applying for a construction loan than for a car, furniture, or even a home for that matter. Yes, of course, your income and credit ratings are important but your assets are also involved. The amount of cash on hand (in accounts and various investments) is also looked at. And he’ll also take into account the current value of the building lot as well as the future value of the land/home package once the home is built.
Q: How much down will the banker require before loaning the money?
A: Invariably, a banker wants a down payment. This is to demonstrate that you have a financial involvement and are not apt to walk away from the project before you’re done. After all, in construction, until the home is completed, there really isn’t much collateral there for the banker to recoup should you flake out! Often 20% is the minimum required but there are exceptions to this!
Q: Does my land have to be owned in full before the bank will loan me money?
A: The short answer here is “yes.” There are exceptions to this as well, but most bankers want the land as the only collateral they’ll have at first. Yes, and they WILL want first position on that land during the construction process. In some cases, the bank will count the land as part or most of the 20% + down payment requirement.
Q: Can I build the home myself without using a contractor?
A: Not likely. While other lenders may allow for this, it is extremely rare for a banker to go this route. He wants assurances that the home will be completed and completed on time and within budget. Owner builders do not have as good a record with this as licensed builders do. In fact, the banker may even want to approve the builder before he okays the loan.
Q: What if I run out of funds in the loan before the house is complete?
A: Find out up front what the bank’s policy is on this. It’s possible that additional money can be added but only if there is enough potential value in the finished product and you must be able to qualify for the bigger loan if money is added. Many times the bank will not provide additional money. You must be aware of the policy and know where additional money would come from should the need arise.
The Banker Wants Your Mortgage After You Build Your Home
Most of the time the bank gives construction loans despite the hassle because they want your other business including the 30-year mortgage once the home is complete and you move in. While there are certain types of construction loans that automatically become mortgages at the end, often this isn’t the case and the banker is eager to get you to “convert” at the end of the construction loan.
Knowledge about lending and home building or remodeling will put you way out in front and ensure a great experience. Visit