Does the idea of building your dream home excite you? Do you have a floor plan or design ideas that will meet the needs of your lifestyle? Construction loan financing is not as difficult as it may seem. Whether you are acting as your own general contractor, or have hired a general contractor, someone is going to finance the construction loan.
Working closely with a lender will help you determine what you can afford and what the monthly payment will be. Once you have determined your purchasing power, reduce the number by 10% and start there. Construction projects generally run over by 10%.
A construction loan is designed to pay costs as they are submitted to our office for monthly payment. For example, your first disbursement will pay for the purchase of your lot and the closing fees associated with your construction loan. If you are planning on putting money down, it happens on the day of closing for your construction loan and your money gets spent before the construction loan starts being disbursed. As you go through the construction process you will pay monthly interest on the loan. This interest is based on the amount of principal you have drawn to date. As a result, your payments will increase each month as you draw money from the loan to pay for the construction.
When receipts are submitted for payment to our office, it is called a draw request. All draws must be approved by the borrower and verified by the lender. In addition, the new home must be inspected periodically during its construction. Inspections are not done for each draw, only when required by the lender. Typically, inspections are required when 25%, 50%, and 75% of funds have been advanced. Our office does many of the inspections for lenders. In general, Appraisers do not inspect the home until it is substantially finished at which point appraisers provide lenders with a final inspection.
PAYING THE SUBS
Payments are made directly from Ohly Law Office to the subcontractors and a lien waiver check is issued. At closing, Ohly Law Office ensures that all the subcontractors are paid in accordance with the sworn construction statement. The appraiser will note on the final inspection if a portion of the work is not completed and money will be held in our trust account until the specified work is completed.
The following are just a few reasons a construction loan will help you and your builder:
- You pay the interest on the loan as you go
a. Interest cost does not get calculated into the purchase price
b. May help you afford a few upgrades you were dreaming of
c. Interest is Tax deductible
- Frees up the builder’s financial resources for another project
- Avoid paying additional fees/costs for the lot
- Save money on closing costs
a. Builders closing costs don’t get added into the purchase price
b. Applicable fees may be deductible to you