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Collectively our network of strategic mortgage and construction lenders have been funding new construction projects for over fifty years. A lot has changed in the past decade, but our preferred lenders manage to keep up with the times and offer innovative solutions for construction and permanent take out lending.
How Construction Loans Work
Typically, most people either buy their own land and build (custom built home) or buy a finished new home from a builder (production built home). Production built homes usually don’t require buyers to obtain a construction loan. A custom built home requires the owner to find land, finance or purchase for cash, and find an architect, builder to complete the home design and construction. Another option is retrofitting an existing property you are buying or currently own.
Home design can take up to a year, depending on how complex the plans and specifications are and how quickly the owner and architect can achieve a workable building plan. Depending on building codes and municipality requirements you may also have to obtain approval from the city, which can take several months to approve.
Once you have completed the design phase (architectural plans and specifications) and have retained a qualified builder (Green Builders Certifications are important if you are planning to build a high-performance home) your builder will complete a building cost budget and builder contract describing the scope of work, etc., for you to approve. At this point, your lender will require you to execute and sign the builder contract to move forward.
Prior to working with the builder it is important that you contact a lender who specializes in construction (include green high-performance building if this is your preference). Your lender should be familiar with comparable properties in your region-neighborhood and particulars of the land, project in order to approve the project, as well as your credit qualifications. The lender should approve you for the permanent loan take out (end loan) as well as the interim construction loan. It’s important to get clear about any potential challenges that might arise – appraisal value, insurance, cost over runs, title policy issues (exemptions i.e. agricultural, wildlife and other exemptions), time lines, etc., when discussing the scope of work, guidelines, etc., with the lender upfront.
Types of Construction Loans
In order to complete the construction loan process, the land needs to be purchased and titled in the borrower’s name. It is the first step in developing a project financing plan. Some owners prefer to pay cash for the land if possible, which also counts as equity on the construction loan.
Primary Residence, Residential Land loans include the following features and guidelines:
Maximum loan-to-value 80% (20% down payment requirement)
Land over 10 acres need prior approval (conventional guidelines are capped at 10 acres and may require a carve out structure of additional down payment to maximize land acreage)
No agricultural or wild exemptions allowed (may require a re-plat of homestead to omit the exemptions of additional acreage, call for details)
FHA One Time Close
Lender’s who are approved FHA originators and servicers – specializing in energy efficiency and construction lending. FHA’s One-Time-Close Loan allows for low down payments, and can include solar, rainwater harvesting (certain regions) and offers ability to lock in the rate at construction loan.
· One-Loan, one closing – potentially lower costs and rate guarantee-lock for permanent loans
· FHA up to 97.5% LTV financing allowed – Loan limits are regionally based, see HUD Loan Limits PLEASE VIEW HUD LOAN LIMITS FOR YOUR YOUR AREA
· Only one closing prior to the start of construction (6 months to complete project)
· No payments due during construction – interest is financed in loan amount
· First payment begins once construction is complete
· No credit or appraisal expiration once the loan closes, loan automatically converts to a permanent loan once the house is built, however a final appraisal inspection is required.
· Builder must be approved and submit funding draws during construction
Conventional One Time Close (OTC) Loan
In a higher interest rate environment borrowers can lock in both their construction and permanent loan at the same time. This is advantageous if the interest rate trends appear to be going up at least .5% over the construction timeline for completion. The disadvantage of this loan product is the extra premium fee charged for an extended lock period of up to one year and the interest rate varies depending on the lock period. The interest on an OTC can be higher than the current market pricing at the time of completion due to this extended lock pricing guideline of completion of property prior to conversion to a permanent loan. Some OTC loan programs can allow for a "float down"option , which means your rate can go down,. This makes the products attractive for homeowners. Check with your lender to see if this option is available.
· One-Loan, one closing – potentially lower costs and rate guarantee-lock for permanent, 6, 9 or 12 month commitments for construction timeline
· 70% LTV financing allowed – Loan limits @ $417,000 (Fannie Mae Conforming)
· One closing prior to the start of construction (6, 9 or months, timelines must be met in order to avoid loan extension fees which can be charged per diem, based on builder’s construction timeline and )
· Interest only payments based on construction draws, permanent conversion at time of completion, amortization schedule
· Fully amortized loan payment begins once construction is complete-paperwork and final appraisal inspection prior to conversion of permanent loan
· No credit, document or appraisal expiration once the loan closes- however timeline must be met for lock period chosen
· No loan re-qualification once construction is complete
· Builder – owner allowed approved funding draws during construction
· For high performance homes, a preliminary HERS energy audit must be completed
Conventional – Jumbo Two-Time Close
Two-time close loans are construction projects approved for a construction loan and permanent loan take out. In a low interest rate market, these loans are attractive due to being able to secure a permanent loan interest rate at market rates. Unlike a one-time-close, the borrower does not pay for an extended lock period (translates to .25%-.5% higher than current interest market rates) and are able to secure more competitive financing on the permanent loan once the house is completed.
Financing is approved for both the construction and permanent loan prior to the construction loan closing. Borrowers can obtain a reissue rate on title insurance and opt out of paying points on the permanent loan to afford lower closing costs on the permanent take out.
· Allows for more flexibility on permanent loan take out, i.e., reducing permanent loan amount from sales of other properties, stocks or assets
· Up to 85% of construction costs + land equity (subject to loan amount loan to value lender requirements)
· Permanent loan can be locked up to 60 days with no extended lock fees, (free interest rate float down-subject to lender and available loan products)
· Construction – Permanent loans up to $3m
Retrofit Loans – Tear Downs
There are several options available for retrofitting existing homes, depending on scope of work, costs and current equity in the property.
1. Refinance Cash Out
Permanent loan increase to cash out existing equity on property. Most loans are capped at 80% of current value. In cases where the owner has a lot of equity and depending on the current loan amount, interest rate and amount of closing costs it makes good financial sense to cash out to pay for upgrades. You do not need to submit building and construction loan information with this loan product.
2. Home Improvement loan
Subject to 90% of improvements. This is a second lien and is usually priced slightly higher than 1st lien loans. Your loan officer should be able to provide a loan cost analysis to determine if this loan product is most cost effective structure. These loans can be attractive for smaller construction projects below $50,000 costs; especially if the owner has a very low current interest rate /loan on the property. The advantage of this loan product type is to retain current lower 1st lien interest rate and guidelines will allow the new improved (up to 90%) of the completed property value.
3. Tear Down, Deep Retrofit Construction Loan This loan product can fall under two categories:
a) Two-Time Close Construction – Existing liens would be paid off and included in the new construction loan amount. These loans are typically interest-only and borrowers pay on amount of current draws. The payments will increase as the draws are taken down, much like a home equity loan. When the project is complete, a permanent loan would be initiated and the construction loan will be paid off and a fully amortized loan, 30-15-10 years will be closed.
b) One-Time Construction Loan-Existing Home – This loan product allows the owner to lock in the rate for both construction and permanent loans.
· Up to 95% LTV – of improvement costs or appraised value, whichever is lower; purchase or refinance of existing loan
· Maximum loan amount $417,000 (conforming loan limits)
· One closing, permanent loan locked for term chosen, 30, 15, 10 years
· No re-qualification of loan required at permanent take out
Green Energy Money-financed house wins Fine Homebuilding Magazine’s HOUSES 2015 Award
as Best Energy-Smart Home
“The GEM team was thoroughly knowledgeable about all of the ins and outs of green and sustainable building and how to properly construct a loan program that embraced our approach to building (rather than penalizing us for going green the way the other lender tried to do), including our insistence on using only 100% rainwater collection for all of our water needs. Their thorough, customer-centric approach ensured we were guided down the most efficient loan path. I would highly recommend them for anyone contemplating building a green home.”
Tom Kolnowski, Homeowner
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This is not a commitment to make a loan. Loans are subject to borrower qualifications, including income, property evaluation, sufficient equity in the house to meet LTV requirements, and final credit approval. Approvals are subject to underwriting guidelines, interest rates, and program guidelines, and are subject to change without notice based on applicant’s eligibility and market conditions. Terms of the loan may be subject to payment of points and fees by the applicant. Goldwater Mortgage, A Division of Goldwater Bank, N.A, Corporate NMLS# 452955 NMLS, www.nmlsconsumeraccess.org
-An Equal Opportunity Lender