Nov 112014
 

How Construction Financing Works

construction financing

Most buyers need financing in order to buy a home. If you are also going to borrow funds to build a new home, then you need to know about how construction financing works.

Lenders always require collateral, which makes it harder to lend against new construction because there is nothing to attach until the home is built. This is why construction financing usually involves interest-only short-term loans and carry a higher interest rate to compensate for the higher risks involved.

The first challenge is getting an appraiser to establish what the value of the home will be after construction has been completed. Although material and labor costs are easy to determine, the future influence of the market on the value of the land and the finished home is usually a best guess for him/her. This means a greater risk for the lender and something that ultimately has to be paid for by the borrower.

The next step of the process is to establish a construction budget as well as percentage-of-completion milestones that have to be met in order for partial draw payments to be made to the builder.

To protect the lender, before any draw can be requested, an inspector must inspect the work to determine that it has been correctly completed and in accordance with the local building codes. The lender will then give the go-ahead for the lender to make the appropriate payment as per the budget. At the same time, the borrower’s loan will increase and attract additional interest charges.

When the construction work has been completed and inspected for building code compliances, a certificate of occupation will be issued. The final draw will then be paid to the builder, usually with some money held back as a reserve to pay for construction or finishing issues that were not picked up during inspections.

At that point, the borrower usually activates a pre-approved permanent home loan which will pay out the construction loan. A permanent home loan is secured against the fully constructed home and land and carries more favorable terms and a lower interest rate.

Some construction loan products now combine both loans into one, so that the borrower only has to qualify for one loan and also only have one set of closing costs. These type of loans are called one-time-close loans.

Not sure how much you can borrow to have a home built. Please follow this link to see what you need to do to figure out and estimate.

For more information about the different types of permanent loans that are available, please follow this link.

Remember that building a green home is not the same as building a standard home. Depending on what your green goals are, there are many options and choices that need to be made in a holistic way. The choice of these variables will not only determine the final construction loan amount, but also the cost of running the home and its level of indoor air quality and comfort. For more information on this please follow this link.

Please also see our information about the One-time close construction loan as well as the Energy Efficient Mortgage (EEM) and other useful loans on our Green Home Financing page.

Thank you for your interest in building a new green home. and feel free to contact me if you have any questions. It will be my personal pleasure to meet and help you to make green home living your reality.

Our services at Florida Green Home Brokers are always FREE to buyers, and we contribute $500 towards closing costs if you buy through us, as well as $250 toward our Switch to Green, Switch it Forward Fund, to help fight poverty and climate change. Let us show you how we can be Your Green Dream Team to help you to Live in a High Performance Green Home, that will Save You Money and help you to Pay Your Mortgage Off Years Earlier, while at the same time, live in a home that is Healthier, More Comfortable, Safer and Kinder To The Earth.

Marius Smook – Lic. Real Estate Eco-Broker, LEED AP (Homes), Cert. Energy Rater.

 November 11, 2014

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