One of the first questions to ask yourself when thinking about building your dream home is ...
You’re going to need a substantial amount of money and chances are you’re going to have to borrow most of it. Where and how you borrow it will determine whether you pay a reasonable or an excessive amount for the money you need for your new home.
How to Begin
The first consideration of course, is “How much money will I need?”
As long as you have at least one set of blueprints, most building contractors can give you an approximate cost of construction rather quickly. This is especially important when deciding if any design modifications are necessary to stay within your budget.
Let’s assume that your property and house will be valued at $150,000 by the lender providing your long-term mortgage. If the land is valued at $30,000, you should need $120,000 to pay your building costs. Therefore, you will probably need to obtain a construction loan.
A construction loan is a short term loan used to pay for building your house. When the house is completed, this loan is paid in full, usually out of the proceeds of your long-term mortgage loan.
Lending institutions usually offer construction loans to builders and developers. The best way for you to get a construction loan is to arrange for a long-term mortgage loan at the same time you ask for the construction loan. This makes you a more desirable customer since you will be paying interest over many years. Also, you may be charged lower interest for your construction loan than if you were to borrow it alone.
If you intend to obtain financing for your home, you need to assemble the following items:
- Building plans and specifications for your house.
- High quality drawings, like those available on this Web site, are important. Good drawings reduce errors, risks and loss of time.
- A building permit from your local housing authority.
- To obtain a permit, submit your plans, specifications and a site layout so the building permit department can verify that you meet local zoning and building code regulations.
- A list of the licensed building contractors or subcontractors who will help build your house.
- If you are using a general contractor, his name will usually suffice.
- A written and signed agreement with your contractor(s) specifying the work to be done and costs.
- Waivers of Lien signed by your contractor(s) to protect you in the event that they do not pay their workmen and suppliers.
- Evidence that you have liability insurance against theft, fire or damage to the building and site during construction.
- Your personal financial statements and records.
As a general rule, you will arrange for permanent financing before you seek construction financing. This is especially true if you are borrowing from two different sources. The commitment to lend money on your completed home is taken as security on your construction loan by the second lender.
If you want your mortgage loan guaranteed by the Federal Housing Administration (FHA) or the Veterans Administration (VA), you need to approach those agencies before going to a lender. Be sure to take your building plans and specifications and your personal financial statements. If the agency approves your application, it will issue a commitment to insure your mortgage loan. This commitment naturally makes you a more attractive risk to any lender.
Loan Sources
There are three principal sources of mortgage loans and allied construction loans: banks, savings and loan associations, and mortgage bankers.
The most important objective in approaching any of these institutions is to shop carefully for your loan. You are going to pay a lot of interest for a long time, so you need to make sure that you pay the lowest possible total interest. Compare total interest costs before choosing your lender.
As you search for financing, just remember that since you are about to make the biggest financial commitment most of us ever make, it pays to be very thorough.
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