Construction Mortgage Loan - How It Works

Construction Loans - How It Works

New Home Construction to Permanent Mortgage Loan Program

These programs combine the construction and permanent financing of your project. You qualify for the loan once, lock in the permanent rate, sign one set of loan documents and have up to 12 months to complete your residential construction project!

During the construction period, interest is charged only on the funds that have been disbursed. When the project is completed, the permanent loan period begins.

Depending on whether you can fully document your income or not, you can finance up to $1,000,000 and up to 90% of the future value.
How Does It Work?
This is a "One Time Close" new home construction loan program to finance the construction of a primary residence or a second home providing both the construction financing and permanent loan all in one closing. This means that you sign only one set of loan documents and do not have to worry about re-qualifying, re-appraisals, additional closing costs or signing additional loan documents.

You can lock in the permanent rate at closing, and have up to 12 months to complete your new home construction. During the this period, interest is charged only on the funds that have been disbursed. When the construction is completed, the permanent loan period begins.
Unlike a purchase transaction of an existing home, New Home Construction loans involves determining the value of something that is not yet constructed! To assist the appraiser and the lender in determining the value of the home after it is built, information must provided as to:-
What is going to be built or constructed?
What materials are going to be used?
How much will the material cost?
How much is the actual work going to cost?
How much did the land cost, what is it worth today?
How much will be spent on plans and permits?
You will have two more very important item to be concerned with; they are your choice of the general contractor who will be awarded the contract and the actual text of the construction contract.

From the general contractor, we will need a resume and a builder's application to be completed along with a credit check. This is for your protection as well the new home construction lenders requirement, which ensures that he/she is experienced, has a proven tract record, and will be able to perform under the terms of the contract. Each general contractor approval is good for six months. The fact that we approve a general contractor should not imply that we guarantee his/her work and/or performance.
The actual text of the new home construction loans contract is included in our application package. This is a standard contract that should be used. You should avoid using the services of a contractor who insists on using another text.
In addition to the above, we will of course need the standard income and credit documentation that is required in any real estate transaction.
Basic documentation requirements are explained in more detail in the "Documentation Requirements" page. For a pre-qualification however, all you need do is to complete the simple online secure application .
Residential 1-4 units Construction to Permanent Loans

You can finance the Lesser of 85% of the Cost of Construction, or up to the Following Loan to Values, depending on the income documentation that you will supply.
Documented Income Stated Income No Income Docs:

90% To $ 400,000 80% To $ 400,000 65% To $ 400,000
80% To $ 650,000 75% To $ 650,000 60% To $ 650,000
70% To $3,000,000 65% To $3,000,000 50% To $1,000,000
Cost of construction is defined as follows:
Hard Cost Of construction
Soft cost of construction
Closing costs
Contingency and interest reserve
Example of a Loan Amount Calculation:
Land Purchase Price $100,000 Or Value if Owned Over a yr.
Soft Cost of Construction $ 25,000 Plans Permits etc.
Hard Cost of Construction $225,000 Cost To Build
Closing Costs $ 13,750 Fees, Title, Escrow, etc.
Contingency Reserve $ 11,250 5% of Hard Costs
Interest Reserve $ 10,000 Interest On Amount Drawn
Total Project Cost $385,000
Future Value $500,000 Based On Appraisal

Calculation of Maximum Loan Amount For The Project:
The following is an example of how to calculate the loan amount, for a Fully Documented Loan, Providing The Borrower is also Qualified.
Step 1: $385,000 x 85% = $327,250
Step 2: $500,000 x 80% = $400,000 Refer To The Table.
Step 3: $327,000 Is The Lesser of steps 1 and 2
Step 4: $385,000 - $327,250 = $57,750 Min. Down Payment.