Curious About Building and Construction Loans?
A Guide to Residential Construction Loans with Dave Hall of Equity Resources in California, Maryland.
After this past year in many counties in Maryland and other states as well, there has been a real shortage of homes to purchase. Many prospective buyers have either given up on purchasing due to the competitive nature of the available homes or decided to remodel their current homes. However, there may be an option to get exactly what you want on the exact piece of property you have already, or in an area you may be searching. While the interest rates are still very low this may be the answer to the problem. After speaking with Dave Hall, below are the details to help you decide if this may be the perfect solution for you.
At Equity Resources, we offer loans to homeowners for the construction of residential dwelling units. The purpose of this guide is to share some information about our procedures, and hopefully make the construction process clearer and more comfortable for our customers. The scope of this writing is limited to residential construction loans to individual borrowers. The guide is presented in a question-and-answer format. We have tried to address the questions most often asked by borrowers. A construction loan is a loan made to an individual to facilitate the construction of a dwelling. At Equity Resources, we make construction-permanent loans utilizing fixed-rate or adjustable-rate loans.
How does an Equity Resources construction loan work?
Our residential construction loans are made as “construction-permanent” loans. Maximum loan to value ratio is 95% (or 97% if the borrower fits into the 97% program) for conventional loans, and 96.5% for FHA loans as determined by an independent fee appraiser chosen by Equity Resources. The land plus the cost of construction is used, or the appraised value, whichever is less.
“Construction-permanent” means only one closing. Borrowers lock into a rate and product at closing, before construction begins, paying interest-only payments based on the balance outstanding each month. Once construction is complete and the final draw has been disbursed, the monthly payments convert from interest-only to principal and interest.
How long is the construction loan period?
Our construction loan periods range from 6-12 months. In the majority of cases, this is sufficient time to build a house. If a longer-term is needed due to extenuating circumstances, this should be discussed with your loan officer at the time of application.
Do I have to own a lot before I get a construction loan?
No, however, the building lot must be titled to the borrower before a construction loan can be filed. The Equity Resources construction loan must be the first and best lien on the property. Lot equity can be used to meet Equity Resources down payment requirement. In some cases, depending on the value of the lot and the cost of the dwelling, a borrower may be able to borrow a large portion of the lot cost and include it in the construction loan. This should be discussed with your loan officer prior to the time of application. The construction loan application, in most respects, mirrors the application for a loan on an existing dwelling, with one important exception. Since no house exists at the time of application, a set of detailed blueprints (plans) must be provided by the builder. The loan is based on the appraised value of the building lot, plus the home to be constructed.
Following is a list of items that should be brought to Equity Resources at the time of application:
Detailed and accurate building plans (one set) – Builder provides
Specification list – Builder provides
Builder’s cost breakdown – Builder provides
Executed building contract – Builder provides
If the borrower is purchasing a lot in conjunction with the construction loan, a copy of the purchase agreement will be required.
What do I need to bring with me at the time of prequalification/application?
Income, assets, and liability information as requested by your loan originator.
Provide Complete Supporting Documents:
How do I qualify for a construction loan? Qualifying for a construction loan is done in the same manner as for any of our other mortgage loan applications.
How long does it take to find out if my loan has been approved? It normally takes about 7 - 10 working days after application to learn if the loan has been fully approved. Assuming a loan is approved, the next step is the issuance of a Commitment Letter. Upon receipt, the borrower is required to execute and return to the lender a copy of the Commitment Letter, which serves as a formal acceptance of the loan’s terms and conditions offered by Equity Resources. Upon approval of the loan, Equity Resources will also order all necessary title work required in connection with the loan.
What not to do after pre-approval:
What happens after the loan closes? When the Commitment Letter is issued, Equity Resources will contact the escrow agent (Title Company or closing attorney) to coordinate an appointment to sign the final loan documents, which include the Note, Mortgage Deed, Construction Loan Agreement, etc. Any funds needed to purchase the lot, close the deal, meet full contract price or pay closing costs should be deposited with the Title Company or closing attorney at the time of signing. After papers have been executed, all documents which must be filed of record with the County Recorder are forwarded by the Title Company or closing attorney. Title Companies and closing attorneys work directly with our Closing Department in the transferring of title, filing of the mortgage, and disbursing funds for payment of title charges, lot purchase price, etc. Once the transaction has been filed, or “closed”, a mechanics’ lien survey (also known as the “first picture”) is taken by the survey company. After this picture is taken, work can begin on the dwelling.
Please Note: No clearing, digging, mowing or construction work of any nature can begin prior to closing and the taking of the first picture. At this time, your file is transferred to the Construction Loan Department, where it will remain until the home is completed. You will be assigned a representative, who will assist you throughout the construction period, answer your questions, and address any concerns you may have.
Who pays for insurance during construction? This should be discussed directly with your builder. In most cases, insurance is the responsibility of the homeowner. The builder will, of course, carry workmen’s compensation and liability coverage, but the actual insuring of the property is normally paid by the borrower. We require that a Builders’ Risk or Homeowners’ Policy with theft coverage (for building materials left on the lot and not attached to the dwelling) be obtained. Equity Resources will require evidence of insurance prior to disbursing construction loan funds. Prior to the disbursement of funds, the foundation must be installed and a foundation survey must be done. The purpose of this picture and survey is to make certain that the placement of the foundation complies with all applicable building and lot line requirements. Either the builder or borrower should call Equity Resources when the foundation is in so survey can be ordered and to avoid any delay in payment of bills
How does my builder get paid? At Equity Resources, we pay the builder on a “draw” basis. Bills are paid on a monthly basis, based on a percentage of completion as determined by an independent inspector chosen by Equity Resources. A properly completed, executed sworn statement must accompany each request for payment. Payment to the General Contractor for work done directly by him/her should be invoiced as for any other payee and included on this statement.
When do inspections occur? Inspections will begin upon notification that the foundation is in and will continue throughout construction. These inspections are made for the purpose of determining the percentage of completion of the property and that the home is being built in conformance with the plans and specifications submitted. We do not inspect for the quality of workmanship or materials. Once the property is under lock and key, please notify your loan officer so arrangements can be made for access to the property by our inspectors.
When do my payments start? During construction, interest is billed monthly based on funds disbursed from the loan. Borrower-contributed funds are generally used first since no interest is owed on these funds. Detailed billing is prepared monthly. This statement assumes interest at the end of the month. Disbursements made from a construction loan after the cut-off date will be included in the following month’s billing. Construction loan interest payments must be received monthly and are considered late if not received within 15 days of the due date. Upon completion of the property, the loan is transferred to permanent status and regular monthly payments begin. Upon completion of construction, the loan is automatically transferred to permanent status. This arrangement can be made by calling your construction loan representative in advance of the expected completion date and reviewing Equity Resources requirements at that time. We will generally require:
A copy of the occupancy permit
Final Affidavit from builder
Written instructions regarding disbursement of any remaining construction funds
Final inspection report (ordered by Equity Resources)
Hazard Insurance Policy
When construction is done, how do I get my loan transferred to permanent status? We will require a Loan Modification Agreement, which sets forth the actual beginning payment date, the revised maturity date, and the actual loan amount and monthly payments. We do not escrow funds for payment of real estate taxes and insurance on our construction loans. These are paid directly by the borrower during the construction period. However, once construction is complete and the loan converts to principal and interest payments an escrow account can be added to the loan.
In this guide, we have tried to answer the most frequently asked construction loan questions and give an overview of Equity Resources construction lending procedures.
As with anything, you will want to find a local knowledgeable expert team that works diligently and tirelessly on your behalf. For assistance finding real estate, an area builder, architect, or contractor feel free to contact us directly. If you have further mortgage questions or concerns, please take the time to call Dave Hall at Equity Resources mortgage.
THIS GUIDE IS PROVIDED FOR INFORMATIONAL PURPOSES AND IS SUBJECT TO CHANGE WITHOUT NOTICE.