Financial Smarts – Part 2

What Loan Is Right For Me?

Once you’ve been approved to receive a new loan to build your custom home, the next step is to determine the best loan for your needs. 

Construction-Permanent Loans

There are a variety of loans to choose from, each with their own set of rules and terms. Your loan officer can walk you through all of the options and help you choose the right one.

If you’re building a custom home, you’ll want to consider a “Construction-Permanent” loan. A Construction-Permanent (or Construction-Perm) loan has two phases: the construction phase and the permanent phase. The construction portion of the loan funds the construction activities during the building phase of your home. In this phase, you will make monthly payments based on how much money is drawn from the lender. As construction progresses, more money will be drawn from the loan. If you’d like to know just how much money is due and when, your mortgage lender can print out a spreadsheet detailing a fairly accurate estimate. With a Construction-Permanent loan, there is one set of closing costs that are paid at the front end.

During the construction phase, builders will typically receive a deposit when the contract is signed and then will draw from the loan monthly. The borrower would only pay interest on payments based on the draws taken by the builder. I find borrowers are very relieved to hear this as the payments are lower during the construction. An independent inspector hired by the lender will come out to the construction site at each of these stages and check on the home’s progress so the lender can release more money to your builder. Keep in mind, they will not check for quality only to see if the builder is on schedule to receive payment. The borrower should always ask if there are any penalties if construction goes longer than 12 months. This is very important for a custom build, as the timeframe for the build is longer than speculative.

Transitioning from Construction to Permanent

When construction is complete and a Certificate of Occupancy is issued, the loan modifies from a Construction-Permanent loan to a permanent loan. At this time, monies for homeowner’s insurance and property taxes are due into an escrow account. This usually ranges from 1.5 to 2 percent of your loan amount. Your lender will draw up the final papers that confirm the construction phase of the loan has ended and the permanent phase of the loan is beginning. The final check is made out to you and your builder

for you to sign and hand over to the builder. However, you don’t have to sign that check over until you are completely satisfied with your builder’s work.

Consider Builder Financing For Your Home Loan

There are typically no additional closing fees with the permanent loan. Another option to consider for a loan is using your builder’s financing source. Some builders offer special financing packages. Be sure to ask your builder if you qualify for that option. Using a builder’s financing can be just as effective as using a bank loan. Generally speaking, it’s easiest and fastest to go with your builder’s financing source if they are competitive in the market.

But what if you’re not building a custom home? What if your builder has a home that’s already done and you’d like to buy it and move in immediately? This is the most common situation for homeowners. You will need an end loan. You can still determine whether you want to have a fixed, adjustable, or interest-only rate with an end loan. Be sure to talk with your mortgage lender about your expectations.

Conclusion

Determine the best loan for your financial needs after discussing the options with your loan officer. With so many programs and options available, choose the one that is right for you. Be sure to read Financial Smart – Part 1 here. 

-Sean Sullivan