Step-by-Step Financing

Step 1:  Pre-Qualifying for Financing

So, you have been struck by the bug to build your home in the mountains! Congratulations!  Before starting this journey, one of the first things to do is to find out how much of a house you can afford.  Currently, 100% financing is all but a thing of the past, so be prepared to have funds put aside for such things as down payments and closing costs.  Make an appointment with a lender, one recommended by your Realtor, friend or business associate for your “permanent” or end loan and be prepared to ask questions.  Most lenders will be happy to meet with you to pre-qualify you at no charge (or for the charge of a credit report).  The lender will ask you about your income, debts, and assets, in order to determine what amount of loan you qualify for and will make suggestions on the kind of loan that may work for you.  The lender may also make suggestions about any credit issues you may have and should give you a Loan Estimate of the costs involved with the loan.

Step 2:  Land Loans

Depending on your schedule, you are now ready to purchase your land.  Your Realtor should include such provisions in your purchase contract for time to complete your “due diligence” or “check out everything” period.  A land loan is usually a short-term loan understanding that this period allows you time to finalize plans, costs, and a construction loan.  Often it is an “interest only” loan because it is understood that it will be paid off by your construction loan.  The interest charged on this loan is usually tied to the Prime Rate plus some up front discount points.  A discount point is 1% of the loan amount as a one time cost towards your total cash to bring to the transaction at the closing.  Once you have your plans and costs either developed by you as the General Contractor or developed for you because you have hired an architect and General Contractor, you will need to apply for a construction loan.

Step 3:  Construction Loans

Whether you apply to a bank or mortgage company, the loan approval process is generally the same.  Banks, of course, have one source of funds, while a mortgage broker has many.  Be prepared to bring in the cost breakdown, plans, and construction contracts for the lender.  After qualifying you, the lender will order an appraisal to determine the value of the property as completed.  Usually, the lender will base the loan approval on costs or appraisal, whichever is LOWER.  A construction loan is also a short-term loan and is funded as work or a percentage of work is completed.    draws, the funding for work completed is paid usually on a monthly basis, based on your or your General Contractor's request for funds and an inspection for work done by the lender.  Some lenders will do the construction Loan and expect you to secure permanent or long-term financing either from another lender or will make the permanent loan themselves.

Step 4:  Permanent Loans

A couple of months before the home is complete is time to start looking for a permanent loan to “take out” or pay off the construction loan if that has not already been accomplished.  This loan is no different than a loan you would get if you were purchasing an existing home.  You already have an idea of the process from the experience you had when you are pre-qualified.  A word of caution: during this whole process, anything related to income/debt/assets in process should be referenced to loan officers as a heads up so they can instruct on if its acceptable or not.  For example, purchasing a car in the middle of the process or opening a new credit card could put your loan approval in jeopardy.