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Sorting Out Construction Loans In Todays Changing Marketplace

Jan 24, 2008
If you are planning a major home remodel, there are several things you need to consider before starting the project. You need to ask yourself if the money you spend is a wise investment. Should you ever want to sell your house; will the neighborhood support the price you would need after the remodel? In many cases it might be better to find a bigger house that better suits your needs instead of spending a lot of money on the one you currently own.

How Construction Loans Work Construction loans, being story loans, require the lender to know the story behind the planned construction before they will lend the money. Because of this, these loans are not standardized like many loans are underwritten to Fannie Mae or Freddie Mac guidelines. With that being said, there are usually some very common features of these loans. They usually require interest-only payments during the construction process and become due upon completion. Completion usually means that the house has gained its certificate of occupancy.

Construction loans, being story loans, require the lender to know the story behind the planned construction before they will lend the money. Because of this, these loans are not standardized like many loans are underwritten to Fannie Mae or Freddie Mac guidelines. With that being said, there are usually some very common features of these loans. They usually require interest-only payments during the construction process and become due upon completion. Completion usually means that the house has gained its certificate of occupancy.

Construction loans, usually being variable-rate loans, are most often priced at a spread to the prime rate or another short-term interest rate. The loan-taker, the contractor, and the lender establish a schedule based on the different stages of construction, and interest is charged on a figure based on the amount of money disbursed to date.

Bathrooms are another big expense in a major home remodel but they too can help you get a good return for your money. Modern tubs and sinks can change the look of an old bathroom and make it look new. Tiled floors can be custom made to your specific tastes and they are virtually indestructible. Bathroom cabinets can be custom built to add your own personal flair.

Many homeowners use construction-to-permanent financing programs. This is where the loan is converted to a mortgage loan after the certificate of occupancy is issued. This makes for only one application and one closing. Simplifying the process in this way is a great and a very effective, time-saving idea.

Financing The first component of a construction loan is the soft costs. They consist of architectural plans, engineering, and permit fees. They should be taken care of before all else. Second are hard costs. They are all the actual physical costs of construction. Third are closing costs; consisting of lender and origination fees. These also include the title and closing fees. Fourth are inspection fees. These can become very costly, even in simple circumstances. Fifth are reserves; consisting of interest reserve and contingency reserve. Last is the existing lot pay off.
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Dont forget that you can download a great construction loan ebook 15 things you should know before you even think about applying for a construction loan.
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