The Basics of Simple Construction Financing

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.