Construction Loan FAQ
Q. What is a Construction-to-Permanent (CTP) Loan?
A. Often, getting approved for a construction loan can be tricky. In many cases, two loans are required--one for construction and one for permanent financing. Usually you will have to pay closing costs on both loans, not to mention the extra paperwork, time and hassle involved. But at HCLG, we offer a single-close Construction-to-Permanent Loan that combines both construction and permanent financing into one loan.
Our Construction-to-Permanent Loan allows for a construction period of 6 to 12 months. Other options also available. And when your project is complete, the loan simply converts to a permanent mortgage.
Q. Can I qualify for a home loan if I just started a new job?
A. Yes. If you have two or more years experience in the field of work you are currently employed in, you can qualify.
Q. Do I need to own my lot free and clear before I can get a home construction loan?
A. No, your lot can be included in your construction loan.
Q. How long does it take to get a home construction loan?
A. It can take as little as four weeks if you have already selected a lot, floor plan and contractor.
Q. If I have had a bankruptcy can I get a home construction loan?
A. Yes, if the qualifying individual has had their bankruptcy discharged over two years ago and has a middle credit score of 620 or better, they can qualify for a home construction loan.
Q. Can I act as an owner builder or do I have to have a general contractor?
A. You can act as an owner builder or use a general contractor or project manager. If you are unsure, our construction loan specialists can help you walk through the decision.
Q. How much can I borrow?
A. There are a lot of variables that determine the actual dollar amount you can borrow, however for loan amounts under $300,000 you can borrow 95% of your construction and lot costs. This is with the condition that the completed home has an appraised value that is greater than construction and lot costs. For loan amounts greater than $300,000 your construction loan specialists can give you the ratios.
To find out exactly how much you qualify for CLICK HERE.
Q. How competitive are the interest rates for the construction and permanent loans?
A. You might think that with the requirements being as simple and accommodating as they are that rates would be higher, however rates are extremely competitive and can be quoted once sufficient information has been gathered by your construction loan specialists.
Q. Besides the contract price for building my home, what other costs may be associated with the construction of my home?
A. A fixed price contract should take into consideration all materials and labor. You should read it thoroughly to be certain you know what's covered and what's not. The contract price may only include on-site costs (construction materials and labor) for a project. Off-site costs (the paper that leads to the construction) should also be taken into account. These include the architect's fees, engineering fees, soil reports, city and county permits and fees, and builder overheard/supervision.
In addition to the contract price, it is common for a construction lender to build a contingency reserve into the loan. This is a specified percentage or dollar amount usually required by the lender in case of unforeseen circumstances that could negatively impact the construction of your home. The amount required is usually based on a percentage of the contract price, on-site costs or loan amount. You should ask your lender about its policy regarding funds that remain unused after the construction of the home.
Additional costs include any construction loan closing costs and fees and special insurance requirements. These will vary and should be discussed with your construction lender. But don't worry; we have a Construction-to-Permanent Loan that includes on-site costs, off-site costs, closing costs, interest reserve, contingency reserve and lot purchase or value.
Q. You mentioned the term "fixed price" contract. If I contract for work to be done, doesn't it automatically mean that everything is covered?
A. No. Some contracts are referred to as "cost plus" because they guarantee the price only for the contractor's supervision of the job and may exclude a portion of the costs for materials and labor. Other contractors may cover both labor and materials but include a clause that permits the contractor to charge more if there are material shortage or increases in costs. You will want to clearly define what is covered and is not covered.
Q. When will I have to make loan payments?
A. You may not have to make any payments out of pocket during the construction period at all. An interest reserve is incorporated within the loan amount. Depending on how quickly you use your construction funds, there may be sufficient funds within the construction loan to carry you through (or almost through) the entire construction period. Of course, if you use the money faster than expected, you will have to make some payments from your own funds outside the loan during the construction period.
Q. What will documentation will be need in order to review my loan request?
A. In addition to standard credit documentation, we will want, at a minimum, copies of the following to start the process:
- Final plans and specifications. These are needed in order to obtain an appraisal.
- Purchase contract for the lot (or Settlement Statement if you've already purchased it).
- Property profile (description of materials).
- Line Item Cost Breakdown from the builder.
- Builder's construction contract or a Consultation Agreement (if you are going to be an Owner/Builder).
- Copy of Builder's license.
- Builder's statement or application.
Keep in mind that you need to obtain the necessary building permits for your community.
Q. How is interest calculated and paid during construction?
A. Interest is charged on disbursed balances, not the whole loan amount. Borrowers are billed every month the interest due on their loans. The interest amount due will be automatically charged to the allocated interest reserve account in the borrower’s loan budget, or paid directly from the borrower’s own funds.
Q. How are disbursements made?
A. There are two types of disbursements, off-site and on-site costs. All disbursement requests have to be accompanied by a draw request form. The draw request form is executed by borrowers and contractors, specifying the amount of the draw and the type of draw, off-site or on-site costs. Additionally, all off-site costs draws should be accompanied by a receipt and or cancelled check, reimbursing the borrowers for the expense of that line item. Builder profit and overhead is disbursed with accordance to overall percentage of completion of the construction project. An on-site cost disbursement requires an inspection, and a title endorsement that searches for any liens recorded against the property. Upon receipt of the inspection and title update, funds are wired directly to the borrower bank account.
Q. What is the difference between contractor's and lender's contingency?
A. Contractor’s contingency is funds available to the contractor to cover cost overrun, and are part of the total contract price. At completion of construction, these funds are generally unconditionally available to the contractor by contractual agreement.
Lender’s contingency is funds available to the borrower’s benefit, to cover any unknown and unplanned conditions that may not be not included in the builder’s contract. These funds if not used at completion, are for the borrower’s benefit; the contractor is not entitled to any part of these funds.
Q. How is a borrower's down payment calculated, and when is that payment made?
A. A borrower's down payment is the difference between the total construction costs (including land, closing costs and reserves) and the amount of the loan. Borrowers will receive credit for any prepaid expenses or equity in the land; all those prepaid items have to be documented by paid receipts and or cancelled checks. The balance of the funds to complete the construction are due at the loan closing, just as it would if borrowers where purchasing an existing home.
Q. I heard that some improvements require deposits. Is this true?
A. Yes, some vendors for items such as cabinets, windows, or any specialty improvement that requires custom craftsmanship requires deposits. The amount of the deposit is typically 50% of the total cost of the improvement and paid directly to the vendor. The remaining 50% of the improvement is paid after installation.
Q. When do I get reimbursed for these deposits?
A. Requests for deposit reimbursements are usually made along with your normal Draw Requests.
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