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Financing Your Custom Home Build – How to Approach Construction Loans

How to Fund New Home Construction

Building a new home usually requires getting a loan to finance the home during construction. Construction lending is a little different from regular home lending because the bank is lending money on something that doesn’t yet exist. Because of this, there are usually stricter criteria on construction loans than on regular loans.

New home construction loans are generally more difficult to obtain, and usually require a 20% down payment. Even though I have heard of a few special programs, I have never been involved in a project with less than 10% down – and even that is rare.  These loans also have stricter income and credit requirements.

Where to Find Construction Lenders in Thurston County

Construction loans are a specialized form of lending which many banks don’t offer. However, some credit unions and smaller, regional banks do offer new construction lending in Thurston County. Here is a list of lenders that I have successfully worked with in the past.

About the Lending Process

  • With a construction loan, the loan is set up before construction begins.
  • The borrower and builder submit the plans, specifications, contract, and land to the bank.
  • The bank does a ‘plans and specs’ appraisal on the project.
  • The appraiser determines what the home will be worth after it is built on the property as agreed.

Appraisal of the estimated post-construction value of the home serves just like an appraisal on an existing home would in a normal real estate transaction; A construction loan is similar to a regular loan in the other respects. You will still go through income verification, credit check, and all of the other seemingly endless documentation. The contractor also has to go through a qualification process to make sure that he pays his bills and will have the financial wherewithal to complete the project. Kobza Home Builders has completed this process with most of the lenders in our area.

  • Once the loan is closed, the bank sets up an LIP (Loan in Process) account. The proceeds from the loan and your down payment are put into this account at the bank.
  • As the home is built, the money is drawn out to pay for construction.
  • You pay interest on the loan each month for the amount that has been paid out by the bank. Your down payment money is drawn out first, and does not incur interest charges.
  • At the end of each month, the bank does an inspection of the project and the builder does a draw request. This determines the percentage of construction that is going to be paid out for this month. The draw is then created. The client, the builders and the bank all sign off on the draw, agreeing to the amount. Finally, the payment is made to the builder. This process is continued each month until the house is done.
  • When construction has been completed, the bank normally requires a final inspection, and they want some documentation including things like the final occupancy certificate and the septic system as-built. The bank wants to make sure that the home can be occupied, and that it was built the way everyone agreed to in the beginning of this process. This is because the house is now serving as the collateral for their loan, and it is worth a lot more to them if someone can actually live in the home.

When does the Lending Process Begin?

The construction loan process may begin before or after you have purchased your land.  If you have not purchased your land yet, the construction loan can be used to finance the purchase. This allows you to avoid getting a land loan which is hard to get and expensive. It does require some planning so that the closing timing works for everyone.

In order to close the loan, you need to have everything ready for construction including plans, appraisal, contract and usually permits. All of this has to be prepared while the land seller is waiting to close the land sale, and they obviously won’t want to wait forever. Because of this, there are a lot of things that need to be done quickly once the land contract is signed, and I can help with those steps.

When everything is ready, you can close on the land at the same time that you close on the construction loan.

Begin your Lending Process Early

This whole procedure may seem a little overwhelming, but it is not that complicated. One of the important things is to get started on the finance process early, and it is also important to find a good lender. Be diligent about providing your lender with all of the information they need – there are a lot of pieces of information required for this type of loan, and the bank needs all of them to do their job. The quicker you provide them, the better the process will go.

I can help by providing you with a lot of this information and facilitating the process, like I have for many of my clients.

How Can I Help You?