loan is typically
a short-term loan used to
pay for the cost of a new residential property, such as a primary residence. It
may be offered for a set term (usually around a year) to allow adequate
building time. At the end of the construction process, a new loan will be needed to pay off the construction
loan – this is
sometimes called the ‘permanent financing.’ This means you must refinance and
enter into a new loan that is a more conventional financing option for the completed
building, such as a fixed rate 30-year mortgage. In some cases, however, you may have the option to modify your
existing construction loan to a permanent financing option without having to
fully refinance your outstanding construction loan.
***10%***A typical down payment required on a construction loan will be ten
percent of the appraised value. In some cases total out of pocket monies used
for down payment can be less than ten percent if the cost to build is lower
than the appraised value.
The lender needs detailed specifications
This includes floor plans, as well as details about the material to be used including the
cost. Builders often put
together a comprehensive list of all details in the form of a bid, construction
contract, and a drawing (blue prints) of the build job.
Building value must be estimated by an appraiser
it can seem difficult to appraise something that doesn’t exist, the lender must
have an appraiser consider the building specifications, as well as the value of the
land being built on. These calculations are then compared to other similar properties
with similar locations, similar features, and similar size, with an
appraised value being determined from these.
Draws are designated intervals at which
the builder can receive the funds to continue with
the project. There may be several draws throughout the duration of the build. It is also common for the credit union to inspect the
build at each requested draw period to ensure that everything is on track and
that the money is being spent appropriately.