Financing New Construction
Financing your project is the first step. Before you can begin to seek out a lot, if you haven’t already purchased one, and hire a General Contractor, first you have to know for how much money you can qualify. I did what’s called a “one-time-close”. What that means is that I wanted to finance my lot and my construction loan at the same time. If you already have your lot, then all you need is a construction loan.
Pick a good bank. This means, pick a bank that has a very strong construction loan department. Avoid the big banks and go local or small. The chances that problems surface during the construction of your home are very high. You want a bank that has experience so they can help you overcome hurdles with your builder. You need a bank that can give you serious attention when you need it.
DO NOT USE YOUR BUILDER’S BANK. If you have already found your General Contractor and he wants you to use his bank, don’t do it. Again, things can go wrong and you need your bank on your side when they do.
I qualified for a 90-10 loan, i.e. I only had to put down 10% but it was a 20-year note. Once my home was completed I ended up with a lot of equity. The home values in the area where I built went up so I was able to restructure my loan to an 80-20/30-year note when it was time to roll the loan into a mortgage. Doing this does incur new closing costs but I was able to roll them in. I did this because I needed to bring my monthly payments down. You may not be able to modify the terms of your loan but keep this in mind in case you can. Ask your lender as you draw closer to the end of your project if you can re-modify it.
Once you have been pre-approved there are some things you’ll need to have in order to get the financing to begin your project:
A lot. Either have it in your possession or have one picked out and include it as part of your loan.
You will need a survey of your lot.
Architectural plans – completed. Ask your bank if they require that they be permitted before they can approve you. My bank did not require it.
A General Contractor – your bank is going to want to vet them financially.
A budget - This is an itemized list of construction costs. It looks something like this beginning with Breakdown of Construction Costs. Your builder should be able to provide this.
A construction contract with your builder; and a sale contract for the lot if you are also purchasing a lot.
Once you’ve closed you will have money available to you to begin paying for the cost of building your new home. Your builder will be paid drawing money from your bank as the project moves along. I will cover draws in another post.