STEP 1: PRE-QUALIFYING FOR FINANCING
So you have been struck by the bug to build your home in the mountains! Congratulations! Before starting this journey, one of the first things to do is to find out how much of a house you can afford. Currently, 100% financing is all but a thing of the past, so be prepared to have funds put aside for such things as down payments and closing costs. Make an appointment with a lender, one recommended by your Realtor, friend or business associate for your “permanent” or end loan and be prepared to ask questions. Most lenders will be happy to meet with you to pre-qualify you at no charge (or for the charge of a credit report). Take care on this point however, you may not want the lender to “pull” your credit if you are at a very early stage of the process as this could hurt your credit. If this is the case, you can go on-line to pull your own credit which will not effect your scores. The lender will ask you about your income, debts, and assets, in order to determine what amount of loan you qualify for and will make suggestions on the kind of loan that may work for you. The lender may also make suggestions about any credit issues you may have, and should give you a Good Faith Estimate of the costs involved with the loan.
STEP 2: LAND LOANS
Depending on your schedule, you are now ready to purchase your land. Your Realtor should include such provisions in your purchase contract for time to complete your “due diligence” or “check out everything” period. (Water and utility availability and preliminary title research). A land loan is usually a short term loan understanding that this period allows you time to finalize plans, costs, and a construction loan. Often it is an “interest only” loan because it is understood that it will be paid off by your construction loan. The interest charged on this loan is usually tied to the Prime Rate. Once you have your plans and costs either developed by you as the General Contractor or developed for you because you have hired an architect and General Contractor, you will need to apply for a construction loan.
STEP 3: CONSTRUCTION LOANS
Whether you apply to a bank or mortgage company, the loan approval process is generally the same. Banks, of course, have one source of funds, while a mortgage broker has many. Be prepared to bring in the cost breakdown, plans, and construction contracts for the lender. After qualifying you, the lender will order an appraisal to determine the value of the property as completed. Usually the lender will base the loan approval on costs or appraisal, whichever is LOWER. A construction loan is also a short term loan and is funded as work or a percentage of work is completed. Called draws, the funding for work completed, are paid usually on a monthly basis, based on your or your General Contractor's request for funds and an inspection for work done by the lender. Some lenders will do the construction Loan and expect you to secure permanent or long term financing either from another lender or will make the permanent loan themselves.
STEP 4: PERMANENT LOANS
A couple of months before the home is complete is time to start looking for a permanent loan to “take out” or pay off the construction loan, if that has not already been accomplished. This loan is no different than a loan you would get if you were purchasing an existing home. You already have an idea of the process from the experience you had when you pre-qualified. A word of caution: during this whole process, anything you do to incur more debt, or to change jobs may effect your credit score or the amount and kind of loan you can obtain.
Writer: Renee Hellman