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Construction Loan Process
Have you ever thought about building the home of your dreams? Most people have! And, maybe like most people, that was as far as you got. The #1 reason people don’t follow through with building their dream home is because they are overwhelmed with tackling such a large project.
Although there are a lot of details to handle, building a home can be a wonderful experience. The secret to a positive experience is understanding the construction process and how a construction loan works. Here we are sharing the key steps to the building and financing process.
Select a House Plan & Specifications with All American Dream Homes
Choosing your home plan and specifications is one of the most important steps in building the home of your dreams. There is a lot to consider when making your selections. It is important that the plans and specs reflect your current lifestyle needs, as well as your needs 5-10 years from now.
Loan Application:
Documents Needed for Pre-Qualification
At this point, you need to complete a residential loan application. Here is a list of documents needed to complete the application process.
- Long Form Application (1003)
- 2 Years of W2s
- 2 Years of Tax Returns (if Self-Employed)
- 2 Most Recent Pay Stubs
- 2 Months of Current Savings Account Statements
- 2 Months of Current Checking Account Statements
- 401k Statements, Stocks and/or Bond Statements
- Offer to Purchase (if Applicable)
- Legal Description of Property
- Current Homeowners Insurance Binder/Builder’s Risk Needed for Construction
If Applicable:
- If on Fixed Income (Social Security or Disability) Copy of Award Letter
- Copies of Child Support/Maintenance – Received or Paid Out
- A Copy of All Bankruptcy Paperwork – including Discharge Paperwork
- A Copy of Divorce Decree
- If in a Trust:
- Need Certificate of Trust Existence
- Copy of Trust Agreement
- Affidavit of Trust Status
Countdown to Closing
Once you have submitted the application and all the required paperwork, your application will be processed to verify the information you’ve submitted. They will confirm that you are capable of repaying the mortgage and that you actually own (or are arranging to buy) the land. There is a lot of work behind the scenes that is necessary to get your home built. We will then order the necessary appraisal and title work for the property and submit the loan for approval. Once you have loan approval and the property is approved, they will close the construction loan. If there is a property loan, it will be paid off at this time.
Special Risks in Construction Financing
Your financing package will most likely be comprised of a separate construction and permanent loan. This type of financing poses a unique risk at the time you are initially qualified for financing, and when you must be re-qualified before the permanent loan can be closed. It may seem obvious, but don’t ever make changes or add any extras without presenting written cost estimates. Prior approval is often mandatory, so be sure we authorize all changes. Remember, any changes to the value of the home, adding any additional debt, or loss of income could jeopardize your end loan/permanent loan pre-approval.
Finally! Construction Can Begin
After the loan closing, the builder can begin construction. This is typically done in various stages that follow a logical progression: land is cleared and excavated, foundation poured, framework built, etc.
Preparing for Permanent Financing
During the building process, you are only required to pay interest on the amount of money advanced. Typically, you have 6-12 months to complete the home and close on the permanent loan. At this stage, your home should be in move-in condition.
You will need to provide a few more documents:
- A Final Inspection Report from the Appraiser
- An Updated Title on Your Property
- An Updated Credit Report
- New Loan Application (Signed)
- Current Pay Stubs
- 2 Months of Current Savings Account Statements
- 2 Months of Current Checking Account Statements
- 401k Statements, Stocks and/or Bonds Statements
- Updated Insurance Binder
Finally, you’ve received the keys and the project is complete. Welcome home!
***Please note that All American Dream Homes is not a registered financial institution and does not provide financing. This information should not be used in place of professional financial advice. Please contact your credit union or bank for professional advice.