Part 2: Q&A with Citizens One Bank Mortgage Lender, Mike Zell

Earlier this week, Mike Zell from Citizens One Bank talked about the Pre-qualification Process. Today, Mike is talking about the ins and outs of construction loans. They are so different from conventional loans so it is important to know what you’re getting into.

Friends, meet Mike (again!)

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How does a construction loan differ from a conventional loan?

Due to the complexity of a construction loan for the lender and appraiser, please allow more time for closing a construction loan than for a standard conventional loan. This is especially important when you are buying the lot and rolling the purchase into the construction loan.

The process for a construction loan is very similar to the approval process for any other form of mortgage financing. We will review your income, assets, liabilities, credit history and a complete appraisal of the future construction project. On a conventional loan the appraisal is done on the existing house, whereas on a construction loan the appraisal is completed from blueprints and specifications provided by the builder.

A construction loan, although requiring the same financial documents and personal information as a conventional loan, has its own unique items in addition to the conventional loan requirements. These items are needed upfront and include: builder contract, full set of blueprints, site work estimate, engineering estimate, copy of deed for land if owned, copy of purchase agreement for land if not owned and Builder Risk Insurance.

The construction loan closes upfront, at which time all funds required for the transaction are due, before any work starts on the construction project. Whereas a conventional loan closes after the completion of the property and all funds are due at the end.

You will not start making full mortgage payments on a construction loan until after conversion to permanent financing, which occurs at completion of the construction project. On a conventional loan you start paying the full mortgage payment within thirty to sixty days after closing. During the construction period you pay only interest on funds disbursed and you are responsible for paying the taxes on the property. The real-estate taxes are paid directly to the county and insurance escrows are not collected at closing but at conversion to permanent financing.

What does a Construction Loan entail?

For clarity the construction loan process explained below is based on a one-time closing, not a two-time closing. The one-time closing is preferred as it saves the cost of having a second closing, locks the interest rate upfront with no second appraisal and no re-qualifying needed at completion of construction.

To proceed with a construction loan the lender will require a copy of the contract with your builder, a copy of your land purchase agreement or deed, blueprints/specifications, and site work estimates including driveway and engineering estimate. The appraisal and property value are determined by the blueprints and specifications as though the house already exists.

The builder will present to you, as part of the contract, a Draw Schedule that usually contains five to seven draws. The builder will request a draw at each phase of construction for work completed.

The bank will send an inspector out to ensure the work associated with that draw request has been completed according to professional and workman-like standards, and complete a short Title search to make sure no liens have been filed since closing or last draw. Once the report is received showing all work completed the draw will be issued. There will be no funds disbursed for unfinished work.

Site work is an integral part of the cost estimate of your construction project and it must be determined at the beginning of the process who is responsible for completing the site work and whether it will be builder or borrower managed. All site work and engineering costs must either be rolled into the construction loan or paid in cash by the borrower at closing. If you pay any out of pocket site work costs including permitting fees you may be reimbursed, if the loan allows, after permits have been issued by showing proof of payment.

Building permits are not required to close on the Construction loan but must be presented to obtain the first draw after closing.

What happens to my Construction Loan after closing?

On a one-time close there is no second closing simply a conversion to permanent financing with no additional fees if all funds have been used during construction.
At conversion the following will be needed:

• Final Inspection showing 100% completion.
• Final Title update.
• Certificate of Occupancy.
• Executed Completion and Acceptance letter.
• Final Lien waiver provided by builder.
• Home Owners Insurance Policy, first year’s premium paid.
• You will begin making full mortgage payments upon completion of the conversion process to permanent financing within thirty to sixty days.

Thanks for the great information Mike!

Dream Big. Build Smart.

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