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Florida Construction Loans FACTS

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Frequently Asked Questions About Construction Financing   

What Types Of Construction Financing Does Florida Home and Loan Offer? 

We can help you with custom home construction with our construction/perm program, acquisition and/or remodeling of an existing home with our renovation program, or with an innovative construction second trust which is based on the "as completed value" of your home. 

What Documentation Do I Need To Apply For A Construction Loan?
In addition to the standard asset, liability, and employment documentation, you will need to provide plans, specifications, and a fixed price (not cost plus) builder contract. If you are using the 203(k) program or the Construction Second Trust, you may act as your own General Contractor and we will need a cost breakdown plus subcontractor's bids/fixed price contracts.

What Is Required Before Funds Can Be Advanced?
Prior to disbursement of funds, you will need to provide: a copy of the building permit and hazard/builders risk insurance. Prior to your loan's conversion to permanent financing we require updated hazard insurance, well certification, a final survey, and the use and occupancy certificate. Other items may be required depending on the type of construction and permanent loan selection.

What Lender Fees Are Associated With The Construction Process?
We collect a fee at settlement, which covers inspections and modification to a permanent loan. There may be an additional fee if you exceed the standard number of inspections and draws. There also may be discount points (never origination fees) for prepaid interest.

When Is Private Mortgage Insurance Required?
Typically, Private Mortgage Insurance (PMI) is required on the permanent loan when your down payment is less than 20% of the completed value of the property.

What will happen if I need more time to complete construction?
Our goal is that your house is completed on time and on budget. We will work closely with both you and your builder to ensure the project comes in on time. In the very rare case when a project is not completed on time there may be a small charge to extend the construction phase.

Who Is My Primary Contact During The Construction Process?
Your Title Company or Settlement Attorney will handle the disbursement of funds at the appropriate intervals and I am always available to handle any other financing related details that may arise. Our Construction Department is also available to assist you and your builder during construction.

What Is The Draw Schedule?
The "Draw Schedule" details the amount available to be disbursed and requirements that need to be met throughout the construction process. Generally, there are 3 to 6 draws. Draws are disbursed by the Title company after inspection by the appraiser to verify the work.

When Will I Receive a Draw Schedule?
You will receive a draw schedule prior to closing. Should you or your builder have any specific needs, please inform your Title Company or Settlement Attorney.

What Methods Are Available For Disbursing Funds?
Funds are disbursed by check to either you and your builder jointly, you, or your builder. As a consumer protection, I prefer to have the check in both names but we can accommodate your preference.

How Does The Draw Process Work?
We will send an inspector out upon you or your builder's request. Upon verification of work completed, we will disburse funds.

How Are Payments Calculated during the construction phase?
Payments are interest only based on the outstanding balance and are due on the first of each month. A bill is mailed to you 15 days before the payment is due. Depending on the program selected, you may have a construction rate which is tied to the Prime Rate and may adjust or a fixed rate

When Should I Lock My Permanent Rate?
Depending on your preference, you may lock in your permanent interest rate at any time. However, keep in mind that there may be an extended lock fee for locks over 90 days. If you are concerned over rising interest rates, you may wish to consider the Smart Lock which will allow a Float Down feature is rates improve significantly during construction.

What Is Modification?
Modification is the process of converting your construction loan into the permanent loan of your choice after construction is complete.

What Do I Need To Modify?
Before modification you must have met all the requirements detailed on your commitment letter and draw schedule.

When Are Escrows Collected?
Escrows are generally required when you convert to a permanent loan. I can help you determine the escrows associated with the permanent financing. Also, please remember that you are responsible for paying property taxes directly during construction.

May I Pay Down On My Loan At Any Time? Are There Penalties?
You may make principal reductions anytime you wish prior to modification without incurring any penalties.


Common Misconceptions About Construction Financing

1.  I have to pay off my lot before I get a construction loan. 

2.  I should pay for everything myself first, then get my loan.

#1 and #2 are the most common misconceptions in building or remodeling today. If you are thinking about new construction, I advise my clients to take advantage of available lot financing programs with small down payments because they will need cash reserves to qualify and to fund a home building project. Frequently, borrowers spend all their savings on their land, plans and permits, leaving themselves cash poor. Also if you want to take cash out of the property to replenish savings by refinancing after construction you must "season" the loan for one year. Another issue is that if you have spent a significant portion of your reserves on lot acquisition, the loan may be more difficult to make due to a lack of liquidity. Remember, if you do not yet own the property and plan to build soon, the Construction/Perm program will allow you purchase the lot or existing home with your first draw.

3.  I should get my lot, plans and builder before I start worrying about the construction financing.

How can you determine what and if you should build or remodel without understanding the financial impact! Unless you are going to build your project entirely from your own savings, you will rely on funds from a lender. Many consumers plan their whole project before consulting a construction lender. They invest years of time and thousands of dollars, only to discover they made vital mistakes along the way, restricting the financing of their project or stopping it altogether. I will help tailor your financial picture to meet current construction lending guidelines, ensuring your qualification for the best and most appropriate construction and permanent loan program.

4.  I should buy my lot, then decide what to build.

One of the major factors in current construction lending guidelines is the appraised value of the finished property. The appraiser evaluates the property for market value and conformity with houses in the neighborhood. In order to determine fair value for a lot, you need to make sure that your home is consistent in size and quality with houses nearby. Over or under building a neighborhood can cost you cash and equity. The fair value for a lot can only be determined within the context of a finished home. Many borrowers have purchased lots for what they thought was a great price, only to find out that the home they wanted will require significantly more cash than they have available. I will work with you and the appraiser to make sure the project makes sense for the property and neighborhood. Also, remember the Construction/perm or Renovation loans will allow you to use the first disbursement to acquire the lot or house is you are planning to remodel.

5.  I can start with a small construction loan at the beginning and just finish the project out of savings as I go. I should borrow as little money as I can get away with.

There are many factors to consider when determining the right loan amount. Many people consider their home loan separately from the rest of their finances. A home may be your largest asset, your largest liability and your best resource for tax reduction. Your mortgage payment will insure or disrupt your ability to sleep at night. The size and type of permanent loan should be determined within the context of your entire financial picture.

While the permanent loan size is a factor in financing your home, it is less important than the financial structure of the project itself. Between your savings and the loan, you must have enough money to cover the entire cost of the project plus any overages. 

Unfortunately some building projects run over budget. It is better to plan for more than you think you need since you can always modify to a smaller permanent loan if all of the available loan proceeds have not been spent. 

6.  Construction loans are just like any other home loan. The best loan is the cheapest rate and fee.

When you purchase or refinance a home, the process is over when the loan funds. With a construction loan, it is only beginning. The success of your project will depend on how well the 6 - 12 month disbursement procedures meet your finances and your builder's style. A problem in this area could cost you months, thousands of dollars, maybe even your project. The variables in qualifying for a construction loan are ten times that of a purchase or refinance loan. 

Lack of knowledge and experience by some loan officers are the reasons that as many as 40% of all construction loan requests are denied. Many lenders and brokers dabble in construction, but have not processed enough construction loans to understand the intricacies of the process. Our construction loans are underwritten and closed by our construction department employees who are not involved in any other type of lending so that your loan will close and disburse correctly and on time. That having been said, my expectation is that construction loans of all types are extremely competitive with any other lender in the country.

7.  I have to sell my home and rent before I can start building my new home.

We understand that you will probably not have sold your current home before you begin building and the fact is built into our underwriting guidelines. One method of addressing the issue is to use a fair market rent calculation to offset your current mortgage payment. Also, if you have a significant equity in your current home which you need to unlock to begin your project, I can help you with a refinance, equity line, or second trust as your situation may warrant.

8.  My house will be worth no more than what it cost me to build it.

Most people have never experienced the home building or remodeling process. No lender will  value the property based solely on how much money was put into your project. We will account for the money you have contributed, but the weight of the underwriting decision will be made on the conservative appraised market value. Many clients find their new home has appreciated in value significantly during construction realizing instant increases in equity.


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