Saying that building a home starts with finding the right location and ends with moving in is quite simplistic. The truth is that in between finding the location and finishing the home, a lot of underlying processes take up much time, money, and energy. Educating yourself on the things that you need to know – planning the budget, choosing the location, and picking a builder with great track record will make the whole process easier.

These days, interest rates are at an all-time low. Now is a great time to build your home if you have the means for it. There are many types of lenders that you can work with, but finding one that has knowledge specifically in construction lending will be better. It is a must that you find a construction lender that understands the ins and outs of financing programs so that they can find one best suited for your needs as you construct your home. This is an important phase in planning to build your house because the loan amount that you will qualify for will determine much about the kind of home that you will be able to build. It is also good if you can find a lender that has an online method of checking your loan status and other particulars. This is for your convenience, so that you can check on the details of your loan at any time.

As a homeowner, you can cut on your costs by opting for a loan that covers the construction phase and converts to a permanent loan once the construction is finished. A one-time close CTP (Construction-to-Permanent) Loan can do this for you.

Before CTPs became a popular option, homeowners had to take out two loans; one for the construction phase and a permanent loan after the home is built. With CTP loans, you won’t have to reapply and pay for two different kinds of closing fees. It streamlines the solution for your financing needs into one neat package. After your loan converts from a construction to a permanent loan, you won’t have to pay any other fees anymore. CTPs also typically have interest protection so you’ll have a fixed interest rate even if the rates begin to rise.

CTPs are reimbursement loans which mean that funds are disbursed as the construction of your home enters different key events. This gives the builders more flexibility in terms of pursuing building projects around your home.

Planning For Your Loan

When taking out a loan, it is important to also take into consideration your lifestyle as well as your family’s lifestyle. Some people fall into the trap of borrowing too much or too little and ending up having to pay for some parts of the house out of their pocket. It’s also good to keep unpleasant surprises at bay by asking your lender how much the closing cost would be. Typically, you will need to ask about the title costs, loan fees, appraisal fees, inspection cost, and the likes.

Working with a lender that has a website where you can check disbursement schedules and schedule of fees would also be helpful.

Understanding How It Works

When you apply for a CTP loan, it means that you are asking the lender to determine the value of your new home, which has not yet been built. In order to do this, you will need to give the lender details about such things as the building plan, the type of materials you will use and their descriptions, and also the total cost of building the house.

The lender would also sometimes ask for you to submit a copy of your builder’s license together with a statement that the builder is capable of carrying out the construction of your home until it is complete. Of course, you and your builder are exposed to certain risks during the building stage of your home. Lenders will usually require additional insurance coverage such as:

• Course of construction casualty insurance – An insurance policy that covers “all risks” including fire, vandalism, replacement cost, builders’ risk, and others. The owner would be the policy holder, and the insurable amount is equal to either the replacement cost or the total loan amount, whichever is lower. Once the construction loan gets converted to a permanent loan, the insurance policy also gets converted to an “all risk” homeowners’ insurance coverage.
• Workers’ Compensation Policy – This should be taken out by the builder to cover for work-related accidents that subcontractors may encounter while building your house.
• Flood Insurance – This is a requirement if your house will be built on a government-declared flood zone.
• General Liability Insurance – This can be provided by you or your contractor. If your contractor provides this, the coverage should be a minimum of $1,000,000 or certain types of policies that have a broad coverage of liability endorsement. If you opt to pay for this insurance, the requirement is a minimum of $300,000 per occurrence which covers both property damage and personal injury.

Building a home means a lot to most people. The journey is filled with many challenges from start to end. Even if you haven’t started building your home yet, knowing about these things will be beneficial so that you can start preparing as early as now.

Construction to Perm (CTP) Mortgages, One-Time Close

Construction to perm loans are essentially 3 loans in one, land loan, construction loan and permanent loan in one transaction. These loans have obvious advantages in that you don’t have to close three times saving you time and closing costs. At closing you purchase your land and extended a line of credit predetermined by your construction cost breakdown plus reserves. The construction loan is converted to long-term financing once you receive your CO (certificate of occupancy), from the county.

During Construction

Prior to close the bank will want to see permits before disbursing monies. Once you have permits in hand you are off to the races. Typically banks will disburse the soft costs (permits, taxes) plus a percentage, of hard costs (nails and boards) to get building underway. After this, the loan is on a reimbursement basis. Banks will want to insure the work and materials they are disbursing on have been completed or delivered. Inspectors are sent to the project site and report back to the bank disbursement department level of completeness.

Subcontractors may ask consumers for funds up front before starting a job. If you feel the need to do this, do so at your own risk. Unfortunately a few bad apples have spoiled the bunch. Banks experienced in construction loans know this is one of the worst things to do since you may never see the subcontractor or your money again. Banks want to protect their asset and customers by mandating inspections before money is wired.

So how does a consumer do the balancing act between payment and inspections? Credit cards and lines of credit can be used during the lag time to inspection. Some consumers simply let the contractor know that they will be paid after inspection, which seems to be a good policy. The entire process of inspections to money in the bank is usually only a few days. If your contractor is really anxious to get his/her money you will have to foot the bill and accept consequences if their workmanship is sub-standard. If you have the contractor’s money hanging in limbo at least you will have leverage to get the job done if problems arise.

Converting Your Construction Loan to Permanent Status

Once you received the CO from the county you are now eligible to convert your loan to permanent status. Since you have already signed all your paperwork for the permanent loan at your first closing, you will only be required to sign a few documents. This should come at no cost, re-qualification or formal closing.

Down Payments

Down payments will vary depending on loan size and amount of existing equity in your property. In most cases, if you own the land already the bank will accept existing equity in the land as a down payment or will accept monies used for down-payment at purchase. All banks have different requirements depending on the loan size but most use two factors LTV (loan to value) and LTC (loan to costs) to calculate down payments. Ask your lender what to expect for money down early. Don’t get surprised when it’s time to close.

Closing Costs

Besides a down payment, closing costs are the next big question for your lender. Since construction loans are more complex and take substantially longer to close (due to the process of finalizing plans and bids) lenders may charge up to 2% in origination. Other than origination fees, normal closing costs are incurred like typical refinance or purchase mortgages. Date down endorsements, or mechanics’ lien checks, will be the exception. Date downs are periodic title searches conducted to insure no subcontractor has placed a lien on your home for non-payment.

Closing costs are finance charges above and beyond the normal interest you would pay on a loan. Like any mortgage, closing costs should be examined closely but your main concern should be making sure you are working with a professional that has construction loan expertise and treats you fairly.

Know Who You’re Working With

An experienced loan officer will be your best asset when building your home. Your loan officer should be available when needed, knowledgeable about construction processes and know underwriting guidelines. Just like construction, you measure twice and cut once, the same is true for construction lending. Find the right originator or you may find yourself starting from scratch when things go wrong.

Interest Rates

During construction “prime rate” or “prime rate plus” programs are the norm, fixed or variable depending on your financial situation. If you are hiring a general contractor your end loan rate should be competitive with current rates you see advertised for purchase and refinance money. If you are an owner builder expect rates to be slightly higher for both the construction and perm loans with float downs to current rates at completion.

Discover Building recommends owner builders consult with insurance professionals in detail to make certain they are properly covered before construction begins. It is extremely important to check all local and state laws concerning insurance requirements and to ensure compliance.

When searching for insurance the owner builder may find it difficult to locate insurers to cover their project since they will be acting as their own general contractor. Some national insurance providers shy away from owner builders completely. In this case the owner builder should seek an insurance broker or “Independent Insurance Agent”. These agents work with multiple companies and can find the insurance you need, usually at a better price too.

There are three types of insurance lenders typically require for owner builder construction loans; Builder’s Risk / Course of Construction, General or Personal Liability, and Worker’s Comp.

Builder’s Risk / Course of Construction Insurance
Builder’s Risk and Course of Construction Insurance are essentially the same thing just named differently by insurance companies. The Builder’s Risk, or Course of Construction, Policy protects the project itself from direct damage. Almost anything that can damage the project is covered. Typical policies cover fire, lightning, windstorm, hail, vandalism, and malicious mischief. The so called “named perils” form limits the types of damage covered by the policy. This section should be checked closely by the owner builder to ensure they are comfortable with the perils covered. Again talk with your insurance agent.

A broader form of coverage is available, yet not necessary for minimum loan requirements, called an “all risk” form. Basically it protects from every risk except those spelled out as exclusions.

Lenders require the Builder’s Risk policy cover the loan amount or the cost to build new figure found on the subject to appraisal (located on page two of the appraisal in the upper left hand cost approach box).

Workers’ Compensation Insurance
As long as a suitable workers’ compensation policy is in effect, the law states that injured workers may recover fixed insurance benefits but may not sue their employers. In some instances owner builders are considered employers so knowing who is responsible for the worker on-site is very important.

In the case of sub-contractors providing workers for a project, they should already have a Workers’ Comp policy, and the owner builder should not allow any work to be performed without proof of this insurance. Owner builders should be keenly interested in their sub-contractors’ Workers’ Compensation Insurance, because workers generally cannot sue project owners for their injuries if recovery is available under their employer’s insurance.

Workers’ Compensation Insurance is a commercial policy and can be expensive. Knowing this, some lenders allow leniency pertaining to this policy by having the owner builder sign waivers stating they will ensure all workers on the project are covered. This means the owner builder is responsible for checking all sub-contractor’s insurance policies for Workers’ Compensation coverage.

General Liability and Personal Liability
Owner builders are legally responsible for conduct and damages on the jobsite and can be sued for negligence. General contractors solve this problem through their General Liability Policy. Since this policy is a commercial policy it can be very expensive for the owner builder.

Some lenders allow a Personal Liability Policy in lieu of a General Liability Policy for minimum insurance requirements. Typically seen in home owner insurance policies, Personal Liability covers against a claim or lawsuit resulting from bodily injury or property damage to others caused by an accident on your property. $300,000 per incident is the normal minimum requirement.

A recent article in the Sacramento Business Journal sums up the general consensus in the mortgage business about how risky loans will be handled in the future. While the article focuses on WAMU, the article could be about any publicly traded bank in the country and still hold true.

“The Seattle-based company lost $113 million on home loans in the first quarter of this year. Washington Mutual said it will make fewer subprime loans, require documentation on a borrower’s income and move into higher-quality loans. ”

But what does this mean for construction loans? Subprime construction loans have always been rare in the construction loan business. Only a handful of lenders would ever considered doing subprime loans for construction in the past and have accounted for very small percentage of the total market. So the fact that subprime loans are evaporating has little impact on the construction loan business.

Stated income loans have been a large contributing factor to the subprime meltdown but aren’t isolated to subprime credit borrowers and were commonplace in construction lending. Stated income construction loans are becoming near extinct and very difficult to find lenders to do them.