It might not be too big of an exaggeration to say that
construction loan is one of more daunting aspects of building your custom home. Before we started our project, I had nightmares about trying to pay two full mortgages at same time (our existing mortgage and construction loan), and I didn't see how it was at all possible. However, reality ended up much more reasonable than I dared hope.COLLATERAL: Many – but not all – mortgage companies require you to own your land first before you apply for construction loan. That way, if borrower defaults, bank has a way to recoup their investment. Some banks will let you roll in land purchase with construction loan, but you may have to pay a premium.
TIMING: Your standard construction loan will be based on one year plan. It's perfectly reasonable to expect to finish within a year, unless you are building a handcrafted log home. The good news is that you aren't obligated for full construction loan amount from day one. You only have to pay interest for amount of money you actually borrow from each draw. So you won't really be carrying full mortgage until end of construction, at which point you will roll construction loan over to a conventional mortgage.
BUDGETING: Before you apply for construction loan, you must get all your quotes in order. Banks are not happy about increasing amount of money you ask for. Be sure to account for all sub-contractors (plumbers, masons, electricians, excavators, landscapers), well and septic, windows and roof, painters, and even grass seed. Your mortgage representative will expect you to have a handle on all your financial needs (see my article BREAKING DOWN THE BUDGET OF YOUR LOG HOME for more specifics). If some of these expenses will be out of pocket, it wouldn't hurt to include them in your construction loan request anyway, so you have a cost overrun buffer. And get more than one quote if possible, then use highest quote in construction loan request. If you go with lower quoted job, you'll have another buffer in your favor.
Before mortgage company agrees on loan, they will require a copy of floor plan, permits, and survey. Then they will send out an appraiser who will inspect your property and determine whether your project will appraise for amount of money they are committing to. Luckily, more and more banks are giving log homes a fair appraisal, but it helps to choose a company that specializes in log homes or your market value may come in too low.
DRAWS: When you've itemized your anticipated expenses, you can share this with your mortgage rep., who will then ask you how you would like to break down disbursements (or "draws" as we commonly know them). This will be your decision (with a little hand-holding). At first, you might want to schedule a couple dozen draws, until you realize that there is a service charge attached to every draw. For instance, every time bank releases a draw, you have to notify them a few days in advance. The bank sends out an inspector to verify that promised work was performed. Then they order a Title Search to verify that you haven't had any liens put on your property since last draw (this costs about $125 each time).
