Ok, lets face it unless you are rolling in cash you are going to have to borrow some money to build your dream home. (If you are rolling in money then please save yourself some time. Quit reading this and just call me.)
In the case of building you often have to get two different loans. The first loan is a construction loan. It is a short term temporary loan that, upon finishing the home, you will convert it into your longer term mortgage. This way you get charged the least amount of interest for the shortest amount of time.
Jim Cobb, owner of Cornerstone Homes, explains that “…Sometimes a builder will get the construction loan, and then at closing their mortgage will pay off the builder based on the contractual agreement of the price of the house and the cost of any change orders”.
The following is a Project Management Contract scenario:
A construction loan feels a little bit like a Home Equity Line of Credit. You get charged interest on only what you borrow. You make draws on the loan as your builder needs to pay for things like building supplies, building materials and sub-contractors (like plumbers, framers and electricians just to name a few). The builder supplies your lender with a list of bills that need to be paid that month and the lender cuts a check for that amount. You are then charged interest by the lender on all of money that you borrowed up to that point. This is a simplified view of this process. Different lenders have different policies. For instance some lenders periodically send an inspector out to see if everything that the builder has requested has actually been done and done correctly. Some lenders require your approval prior to issuing the check. Most lenders have some kind of policy to make sure no fraud is being committed by anyone.
Then in the end you get a longer term mortgage to pay for the construction loan. The longer term mortgage is ever changing and you will have to contact a lender to find the best one for you.
If you are in need of a construction loan I have lenders that I recommend and when you are ready we can discuss your options.
I am Erica, and I help you buy the house you can afford and make it a home you love. Finding a home you can afford can be one of the most important financial decisions you make. Making it the home you love can be one of the most rewarding things you do.
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