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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Thank
you, for your interest in Construction Loans.