Construction Loan - FAQs

No - Due to the current housing crisis many lenders no longer offer stated income loans. You can check with your construction loan expert as it may vary by lender.

Most construction loans come with a contingency reserve.  Contingency reserves are funds set aside in case of overruns.  Typically 5 to 10 percent of the construction costs is set aside, in addition to the construction budget, to help borrowers in case of overruns.

No.  There are programs available, which allow the borrower the ability to begin construction prior to selling their primary residence.  Since payments will be made using an interest reserve account designated at construction loan closing, the borrower doesn’t have to worry about making payments on two house at once.

While interest rates and fees will play a determining factor in a borrower’s decision for a construction loan, the borrower also should place equal emphasis on the loan features being offered.  The best deal is one where the borrower can accomplish all of their objectives.  When working with the right lender, a borrower has the ability to tailor a program to meet; cash flow, interest-rate, and project goals. Working with a construction loan expert will make all the difference in how smoothly the transaction is executed and will educate the borrower on the process, so there are no hidden surprises after the ones closed.

Financing should be your first step in the construction process.  A borrower must understand how much home they can afford before they can begin looking at plans, land and construction costs.  Through a quick consultation with construction loan specialist, a borrower will know exactly how much they can spend on their project.

Yes.  The borrower must provide receipts and canceled checks, to show that funds were used for the project.  These monies can be used towards cash to close.  Permits, plans and material deposits/purchases prior to close all fall into this category.

Yes.  Existing land equity can be used.  Determining equity is done in two ways.  Depending on how long he borrower has owned the property either the purchase price or market value will be used to determine equity.  If the borrower bought a piece of land for $40,000 one year ago and today those $20,000 for the land, the equity is $20,000.  This holds true even if the market value of the property is $60,000 today, because of seasoning.  Market values can be used to calculate equity if the borrower has owned the property, for or more than two years.  Land comps will be needed to justify both market value and purchase price.

There is no uniform answer to this question since cash to close is determined by many factors.  Loan size, existing equity, loan to value and builder type all determine cash to close.  A construction loan expert can tell you exactly how much you’ll need to bring to close very quickly.

Programs are available for leasehold properties with lease terms in which exceed 30 years.

The answer to this question depends on what stage the customer is in the construction process.  If a customer has their plans finalized, cost breakdown completed and general contractor selected closing should take a few weeks.

While programs are available, typically customers with credit scores under 680 will have to bring cash to close or have it substantial equity in the property.

Yes.  The borrower is free to pay down the construction loan to reduce the principal balance and payments.  In many cases, borrowers choose to apply sale proceeds of primary residences.  Prior to converting to permanent.

If you have a one time close loan then there are no additional fees. The only process is modifying to a permanent loan however some lenders today have a two-time close which means you must qualify for the permanent loan and you are subject to a second closing and applicable fees. The fees will vary so speak with your construction expert and they can assist.

Funds are dispersed through draw requests.  Prior to closing borrowers will submit a cost breakdown, which details the itemized costs to complete their home.  Depending on loan draw schedule, borrowers may have five or unlimited number of draws for their project.  In a typical scenario, the borrower or builder will request a draw after work has been completed on the project.  The lender will then schedule and inspection by a third party to verify work has been completed.  Once work has been verified the lender will then wire money to either the borrower or builder depending on how the borrower would like to handle funds.  This process is usually takes three days to complete.

Interest is calculated based on the outstanding principal balance during construction. Interest accrued each month is billed to the borrower.  For customers to utilize interest reserve accounts, the payments are made automatically by the loan from this account.