Why a Construction Loan May Be Right for You
As a real estate lending specialist, I get a lot of calls from people asking what their options are when buying a home – and hear a lot of frustration about not being able to afford the exact home they want.
I recently had a conversation with one such member, who I’ll call Caroline. Caroline and I discussed various mortgage products and terms and spent quite a bit of time talking about how the process works, what is required and what she can expect.
Toward the end of the call, Caroline made a comment about how difficult it was for her sister to find a home – the loan process went okay but there simply weren’t enough homes. Open houses were advertised but quickly cancelled as offers were submitted sight unseen, with multiple offers coming in over asking price. Caroline mentioned that although she was excited to own a home of her own, she wasn’t looking forward to the shopping process, especially considering whichever home she ended up with would likely need some renovation to make it “her’s.” In her opinion, renovations would be just another daunting process on top of the process of purchasing. Caroline just wasn’t feeling the joy she thought she would from buying her first home.
Listening to Caroline describe how she was feeling, it occurred to me that maybe we were thinking about her journey from the wrong angle. If she wants her house, her way, shouldn’t she get exactly that? I knew right then that a construction loan may be an option that would really work for her. She could choose where she wanted to build and what type of home she wanted, right down to the littlest detail – no renovations needed after purchase.
So What Is a Construction Loan?
With housing inventory hitting an all-time low recently, many home buyers are turning to building their own home. In many cases, this option may be cheaper than buying an existing home, especially one that will require renovations and gives you the ability to build the dream house you’ve always imagined.
A Home Construction Loan allows you to purchase the land and fund the build for your new home in one loan. If you already own the lot you will build on, the lot’s value is taken into consideration when qualifying. Mortgage lenders may offer different options for this such as a one-close construction loan, or two-time-close instruction loan, where you’ll have one loan for the construction phase and another loan for the mortgage phase once the house is completed.
At Service Credit Union, we’re proud to offer a one-close construction loan, which means you will only have one closing, and a draw period during the build (maximum of 12 months) with interest-only payments. Once construction of the home is complete, your loan will automatically convert to your permanent mortgage based on the terms you chose prior to closing.
Don’t let the language scare you – partner with a loan officer who will explain the differences in easy-to-understand terms to make sure you are fitted with the best option for you. There are even options for jumbo loans.
What can I expect?
Construction loans do require a few added steps that you don’t find with traditional mortgages. First, the build has to be approved by both your lender and your construction management team. This means the borrower would need to provide supporting documents such as specs, septic design plans and permits, as well as information from the builder including references and a cost breakdown. You will also need to present a signed contract with the builder.
Funds are not released in their entirety at closing. Instead funds will be disbursed periodically throughout the construction period. Funds will be provided in the form of a two party check made out to both you and the builder. This is done so that we can ensure your approval and satisfaction with the work done to-date. At various stages of the build, and based on the construction time line, our construction management team will visit the site to perform an inspection. Based on the team’s recommendation, funds will be released.
A final inspection will take place once your home is complete. At that time, upon final approval, any remaining funds that you may have from the loan proceeds will be applied as a principal reduction payment to your loan. We will then convert your construction loan to your permanent mortgage and you are ready to move in.
Ready to Build?
House hunting for an existing home can seem like a daunting task in the best of market environments. Low inventory, high prices and bidding wars presents an even greater struggle.
I am thrilled to report that not only is Caroline now set on the path of building her own home, but she’s enjoying every magical step of making her dream home her forever home. Plus, after speaking with a few builders, it turns out that this option may actually cost quite a bit less than the budget she had originally set for her purchase.
If you are feeling like Caroline did, why purchase a home that you have to make improvements and updates to in order to make it yours, when you can custom build the home of your dreams? It’s easier than ever build your dream home, and we are here to help.
Authored by: Jennifer Fernandes, Real Estate Lending Specialist NMLS#1529265
*A $500 eGift card will be provided for the qualifying loan types with an application date between Feb 7, 2022 – May 31, 2022. Instructions to redeem the $500 eGift card will be sent electronically to the email address you provided during the application process. eGift cards are processed up to 10 days after closing. Applicant must be a member of Service Credit Union or eligible for membership. Purchased property must be in the U.S., excluding properties in Texas, Alaska and Hawaii. The credit union will issue a 1099-INT for tax purposes. Promotion is subject to change or be discontinued at any time.