Building your home, and what you need to know.

Building your dream home from the ground up is an exciting opportunity. There are so many custom choices to be made, from selecting the kitchen backsplash to picking the flooring in each room. Before jumping head first into the interior details of your dream home, it’s important to breakdown the fundamental aspects of a home construction loan.

Start the process of building your dream home

Similar to a traditional home mortgage, the first step is finding the right lender for you. Home construction loans are dependent on the individual circumstances of each borrower and home construction plan. Construction budget, income, credit score, assets and liabilities are all influential factors when narrowing down the perfect builder or lender.

What is a home construction loan and how does it work?

Home construction loans are short-term loans that are used to pay for the construction of a new home. Payments, or draws, are made throughout the construction process to the builder in order to keep the project funded. Generally, a construction loan will require interest-only payments. These payments are set for a short-term period and are due once the construction has been completed. An “end loan” is acquired once the home construction has been completed. It is used to pay off the initial construction loan.

What is needed for a construction loan?

In addition to getting approved for a typical mortgage, lenders will request that you provide specifications and plans on your home construction as well as a contractor’s statement, appraisal, an end-loan approval, and even a contract with the builder who will take on the construction. Home construction loans may oftentimes be referred to as “story loans” because lenders will need documentation on the story of the proposed home construction in order to determine financing ability.

Construction-to-permanent financing explained

A construction-to-permanent financing program is when a construction loan is converted into a traditional mortgage once a certificate of occupancy has been issued. A certificate of occupancy is simply a local government or building department issued document that certifies the building is in compliance with all applicable building codes and laws. The certificate of occupancy also indicates whether or not the building in question is in suitable condition for occupancy.

How to find the right builder

After you have decided which type of loan best fits your needs, it is finally time to find the best builder to build your dream home. There are several things to look for from a builder:

  • Referrals – Ask family, friends, or contact your local National Association of Home Builders for any builder recommendations they may have.
  • Credentials – Be sure the builder’s necessary credentials are up to date.
  • Compare – Like any other professional, you want to work with the best fit for your needs. Don’t be afraid to speak to a few builders to compare experience and costs.
  • Experience – An experienced builder will:
    • Have a reputation of success along with a high rating from the Better Business Bureau.
    • Have proven experience to show you.
    • Be able to provide up to date insurance and state license.