Construction Loan Process
We will set you up with a local bank that will provide you with what we call “A Three Step Loan”. Different banks may have their own name for this type of loan, but they all generally will function as described below.
The Three Steps are
- Land Acquisition
- Permanent Loan
These Three Steps are all rolled into one loan with one closing. This is the simplest and least expensive loan program available to you. One closing means less cost to you. Only pay for one appraisal, one attorney fee and one set of closing costs.
The bank will typically expect you to make a down payment equal to 20% of the total house/lot package price. Some banks may allow a 10% deposit for certain qualified buyers. Bank lending programs and rates change all the time. Some banks will want you to put your entire 20% deposit down first, before they begin funding your loan others will provide funds on an 80%/20% basis throughout the term of your loan.
For those who put their 20% down up front, most will typically use those funds to purchase their lot. You would typically close on your Three Step Loan at the same time that you closed on the purchase of your lot, so that you could begin construction immediately. If your lot cost was greater than 20% of your house/lot package cost, the bank would typically loan you the balance of the funds needed to purchase your lot.
As part of the Three Step Loan process, we will prepare a Payment Schedule, which is a document that breaks down all of the costs to build your home in great detail. The Payment Schedule is the form that will trigger payments for construction costs from the bank. Before you close with the bank on the Three Step Loan, you and the bank and us, as your builder, all agree, up front, on the cost breakdown of your home. As we move forward with construction we will bill you on a monthly basis for the work that we have completed that month. Everyone has already agreed on the completed value of each item, so when we send you and the bank a bill, the bank will make a site visit to ensure that the work being billed for has been completed and they will then forward you the pre-agreed amount of funding to pay your bill with us.
This process is followed on a monthly basis for seven month until you new home is complete.
During the time of construction, you will be required to make monthly payment to the bank of “interest only”. This means that you will be billed monthly by the bank for only those funds that have been disbursed to date. For example, say your construction costs and Payment Schedule was $420,000 and we billed you $60,000 per month for seven months. At the end of month one, the bank would bill you for interest only on $60,000 at the prevailing rate (let’s say 4% per year for this example). So 4% of $60,000 is $2,400 per year, or $200 per month. Your first month’s interest bill from the bank would be for $200. If we billed you $60,000 again after the second month, your monthly payment would be $400, $200 for the first monthly funds advance of $60,000 and $200 for the second. And then so on through the seven month construction period.
Once your new home is complete and a Certificate of Occupancy (a C.O.) has been issued by the Town, your loan will automatically roll over or convert into your Permanent Loan. The bank will then begin billing you for your regular monthly payments of Principle, Interest, Taxes and Insurance (PITI).
No additional closing or funding is necessary. This conversion happens automatically.