The Construction Loan Process

How does the construction loan process work?

1 Answer

You should first make sure of the amount of money you will be qualified for on a  construction loan. The paperwork to be qualified will include, but not limited to, paystubs, W-2s or 2 years of tax returns if self employed, verifications of all assets, an offer to purchase for your lot, homeowners insurance and any other docs the lender may ask for. These are the basics that are always needed.  So that part of it is just like what you would do to qualify for any home loan.

For the construction part of the loan you will need the plans for your new home and to find a builder.  Once you have found the builder they will more than likely need to be approved by your lender which will consist of a form they will need to fill out along with a copy of there insurance. 

Once the builder is approvedthey will take your plans of your home and get all the bids together for the total cost to build the new home ie. cement work, plumbers, electricians, heating/air conditioning,excavating, materials, labor, permits  and any other cost associated with building the home.  The builder will put a proposal together for the lender along with the plans and send this all to the lender.  An appraiser will also get a copy of the plans and the proposal so that they can do a future value appraisal of the home to get the value once all the work is completed.  Once everything is approved by the lender you will sign the initial lending documents for the construction of your home to begin.

The builder before closing will give the lending company a draw schedule, how many times they think they will need to draw money out of the escrow account that the lender will have for you, normally this is anywhere from 4-8 times during the building process and they also give the lending company a estimated completion date.  The builder will only be allowed to draw money out of your escrow acct once the work is completed, the lending company will send out an inspector once your builder has requested a draw to make sure the work is completed then they will release the money from your escrow acct to the builder, most construction loans you will only pay the interest on the money drawn by the builder under the intial terms agreed to at the closing ie. interest rate x amount of draw.  

When the builder requests the final draw and the home is completed, they will then send the appraiser to the home to make sure the orginal value given is correct.  They will also send the inspector to make sure all work is done.  A certificate of occupancy will also be needed from the local building inspector at this time.

If you are doing a one time close construction loan you will have signed most loan documents before the construction began and you will only a have few more to sign for completion for your loan to be set to the orginal terms at approval after construction is complete.