Financing the Construction of a New Home
Financing the construction of a new home is very similar to the purchase of an existing home. When you select a bank, they review your personal records, you put money down on the home and the bank finances the rest.
Here’s how the construction loan process works:
Let's assume (1) you have your land, (2) your house plan selected, and (3) you have signed a contract with Heartland Builders to build your home. Now it’s time to meet with your bank.
The bank representative you meet with will likely pass along your information to a bank underwriter.
The underwriter will review your personal finances and the cost of the home. The bank will also hire an appraiser to validate that the price of your home is consistent with other homes in the area.
After their review, the bank underwriter will put together the financing plan for your home. The financing plan will be based on either the appraised value of your home or the cost of your home, whichever is less.
The financing plan will specify the amount of your downpayment, the dollar amount the bank is willing to finance, the interest rate and the length of the loan. All very similar to the purchase of an existing home or the purchase of a car for that matter!
What is different, though, is that during the construction of your home you will have a construction loan. As soon as the construction of your new home is complete the loan converts from a construction loan to a permanent loan, such as a 15-year or 30-year mortgage (equal to what you would carry on an existing home).
How a Construction Loan works
The construction of a new home is a structured process that involves the purchase of many materials and professional services each step of the way. To pay for these materials and services, we approach your lender each month to “draw” money from your construction loan.
The moment we draw money from your loan to pay for materials and services, the interest “clock” starts ticking, meaning you owe money. From this point forward each month during the construction process you will receive a bill from your lender.
This bill will be for the amount of interest that has accrued on the amount of money that has been drawn from your loan. It is important to note that under a construction loan you are only paying interest on the money withdrawn, not the principal.
As the building process progresses, we will continue to approach your lender each month to draw funds to pay for building materials and services. For the second through the last draw request, your lender will require that we provide evidence of all payments we have made to date. We do that through the use of lien waivers that all trade contractors and suppliers sign showing documented evidence that they have been paid.
When the construction of your home is complete, we will “close” on your loan. All remaining funds due Heartland Builders will be paid at this time. Now you are ready to move into your new home.
At this point, your loan will convert from a construction loan to a home mortgage. You will begin making monthly installments on your new mortgage, paying both interest and principal on the loan amount.
The financing portion of new home construction works very well. Lenders are very efficient with the process making it easy on both the customer and the builder.
If you would like to learn more about building or financing your new custom home in Michigan, please call or email us today.