What to Expect When Getting a Construction Home Loan
By American Pacific Mortgage / February 9, 2022, at 8:00 AM
Building a new home can bring about a ton of questions - you may be mulling over everything from picking a builder and finding a location to deciding on the specific features you want. And that’s to say nothing of the home’s financing. Unlike an existing home with a permanent mortgage, building a home typically requires a home construction loan - at least during the construction phase. Thankfully, our construction lending team has you covered! We’ve streamlined the construction home loan process so you know exactly what you’ll be dealing with.
Apply for a Loan (About 20 Minutes)
Similar to a permanent mortgage, you’ll need to apply and qualify for a home construction loan with one of our loan officers. You’ll fill out an application as you would with a traditional mortgage.
Many of the loan qualifications will be based on the type of permanent mortgage you plan to obtain, so we’ll make sure you qualify for both loans from the beginning. Lenders will typically review your down payment, credit score, and income during the home construction loan application process.
Your loan officer will ask for documents, pull your credit, and go over your financial qualifications before talking with you about the nitty-gritty of financing—namely, your options with the construction loan, including rate, payment, and closing costs, as well as options for a permanent mortgage once the construction phase is complete.
A bit about these loans
APM uses what’s known as a “two-time closing” for any home construction loan. That means you’ll qualify for the initial construction loan and then once more for the permanent mortgage (aka the final loan) once construction is complete.
Though qualifying twice may sound tedious, there’s no need to worry about extra hurdles in the loan process when applying for both loans. Many people find that the process isn’t that different from qualifying for a traditional mortgage when buying an existing home. And we’ll make sure to walk you through any extra requirements that may pertain to your specific site.
The first loan (the construction loan) lasts only while your home is in the construction phase. You’ll pay only interest on that loan, and there are multiple ways to manage the payments, including building them into the loan itself. Once construction is complete and you’re ready to move in, this loan will be replaced with a permanent mortgage.
There are many options with a permanent mortgage, which we’re happy to go over with you both at the beginning of the process and again when it’s time to put that final piece in place. That way you can not only plan for the future but also work with the current market on what’s available.
It’s important to note that, unlike a home construction loan, the permanent mortgage requires you to make monthly payments on both the interest and the principal.
Step 2: Make Some Decisions (as Much Time as You Need)
Here’s where the brain kicks into overdrive. Once you apply for your construction loan, you’ll want to nail down your choice of a builder or general contractor, the home’s design, and your lot. How involved you are in this process may vary depending on whether you’re buying a spec semi-custom home or if you’re building a fully custom home from scratch.
Most people building a home will at least choose their lot, finalize design choices, get a cost breakdown, set a timeline, and sign a contract with their builder.
When you’re choosing a contractor or builder, be sure to check their references and review their previously completed work. Check with the Better Business Bureau, ask to speak to current or very recent clients, or even ask your loan officer or real estate agent. It’s imperative that you choose a builder you feel comfortable with and confident in: You’re about to work with them for the next several months!
It’s also a good idea to establish a budget before jumping into this process, as building a home can be expensive—but exciting! APM is happy to sit down with you anytime to talk numbers.
Step 3: Loan Approval (About Two Weeks)
All set with your builder or general contractor and the plans for your new home? That’s terrific! We’ll take it from here on the home construction loan side, ensuring that everything runs smoothly as the approval process finalizes.
A bit about the approval process
APM’s exclusive approval process includes three parts:
Once you have your builder or general contractor and a plan for your new home, we’ll make sure everything is above-board. We’ll order an appraisal and get all the project information from your builder.
We’ll need a few things from you or your builder:
Standard documents requested of any borrower (your loan officer will give you a list)
Builder contract with specs signed by builder and homeowner(s)
Builder approval documents
Cost breakdown signed by builder and homeowner(s)
Architectural, site, and mechanical plans (aka blueprints)
Permits (if available)
Step 4: Building Your Home (About 6 to 12 Months)
Break out the shovels and fire up the heavy machinery - it’s time to move some dirt! This is when the fun stuff begins. While you watch with amazement as your home begins to take shape, we’ll keep a close eye on its progress. This will include regular inspections and paying the builder or general contractor according to our agreed-upon draw schedule.
As home construction starts
We will have a meeting with your builder, loan officer, and our construction department to go over instructions on how to request funds for completed work (aka draws) and answer any questions that might come up.
Draws are requested by builders and are submitted based on completed work. Your builder should prepare everything, so you’ll just need to sign off. We will send out an inspector, and if all the work is done properly, we’ll send the requested payment.
If only parts are completed, we will let you and the builder know and will send only part of the draw. This will be based on the items that have been completed correctly.
Step 5: Finalize and Move-In (45 Days)
Once your home is nearing completion—about 45 to 60 days out—we’ll start finalizing your permanent mortgage. This generally involves updating pay stubs and bank statements and verifying funds to close. You do have to go through one more loan approval, which will include new loan terms based on the final appraised value of your home.
This may be new to you (or not), but we’ve done this many times before. We’ll keep the process simple, fast, and transparent. You don’t need one more thing added to your to-do list when you’re building a home!
Once we have everything we need and your loan has been approved by our underwriting team, you’ll have a closing where you pay upfront costs - if there are any—and sign all your loan documents. We’re required to have the documents (aka disclosures) returned a few days before your loan closes, so make sure to get those back to us quickly. This will prevent any delays. Once your loan funds, usually the day after closing, you can move into your new home!
We know building a home involves many moving parts, and you don’t necessarily know what to expect when getting a construction home loan. While it’s easy to overlook construction costs, mortgage rates, and payment requirements in favor of designing a beautiful kitchen, knowing what to expect when getting a construction home loan makes the entire process that much easier.
Fortunately, DIVCAP/APM has been there before. We can arm you with everything you need to make this process and the impending construction phase as easy as possible.
To learn more about the construction process, contact your favorite DIVCAP loan officer, request a copy of our ebook.