Buying a Lot and Building a New House

If you are planning to purchase land and build a new home through a construction loan, understand that this is a multi-step process that involves careful planning, financial considerations, and collaboration with several professionals.

Here’s a step-by-step guide that most banks will use that should help understand the process more clearly:

Assess Your Available Finances:

• Determine your budget: Calculate how much you can afford to spend on both the land purchase and construction of your new home. Consider factors like your income, savings, and existing debts.

Purchase Your Land:

• Find suitable land: Research and identify a piece of land that meets your building criteria. Look closely at things such as location, size, zoning regulations, accessibility to utilities, current structure standing or empty land (Impact taxes), proximity to protected areas such as waterways or tree preservation areas, easements, HOA restrictions, yard grade and elevations, and other vital aspects that can greatly differentiate a good vs a bad property to build on.
• Conduct due diligence: Hire a real estate attorney or land surveyor to conduct a thorough investigation of the property, including checking for liens, environmental concerns, and boundary disputes.
• Negotiate the purchase: Once you find the right piece of land, negotiate the purchase price with the seller.

Secure Lender Financing:

• Construction loan: Apply for a construction loan, which is a loan designed to cover the cost of building your home. Construction loans often have similar rates to traditional mortgages, where the first 12 months are interest only payments based on the disbursed draws to the builder.
• Down payment: Be prepared to make a down payment to secure the construction loan. This is typically around 10-20% of the total project cost. It is also possible to use other collateral to reduce the amount of cash required for the down payment.
• Design and Planning:
• Hire professionals: Work with a custom home builder, architect or home designer to create your dream home’s design.
• It is recommended to find a builder that you’re comfortable with first who will assist in the design and planning, as well as oversee the entire construction process.  They typically have their own architects and designers that they prefer to work with and can create better cohesion between the team.
• Obtain necessary permits: Ensure that you obtain all required permits and approvals from local government authorities before starting Your hired builder will usually handle this process along with their architects and civil engineers in many cases.

Construction Process:

• Construction phases: The construction process typically occurs in phases, with disbursements from the construction loan made at each milestone. Common phases include foundation, framing, roofing, electrical/plumbing, interior, and final inspections.
• Regular inspections: Local building inspectors will visit the construction site at various stages to ensure the work complies with building codes and regulations.

Loan Disbursements:

• As the construction on your new home progresses, the lender disburses funds to cover the costs incurred during each phase of construction. These are typically referred to as a “draw” or “milestone” payment.
• Conversion to Permanent Mortgage:
• Once construction is complete, the construction loan will convert into a permanent mortgage.
• The permanent mortgage will be set upfront when the projects begin.  Many times, you can look at additional permanent loan options with no penalty.

Final Inspections and Delivery:

• After all work is substantially completed and the final inspections have been approved by the local municipality, a Certificate of Occupancy will be obtained, and you are able to move into your new home.

Ongoing Payments:

• You will begin making regular mortgage payments on your permanent mortgage, which will include principal and interest, property tax escrow, and homeowners’ insurance escrow.

Maintaining Your Home:

• Regular maintenance and upkeep of your new home will preserve its overall value, performance, and longevity.
• A newly built home often requires more routine care than older homes and your builder should be able to clarify what is needed.

Remember that the process of building a home via a construction loan on your land can be complex, and it’s crucial to work closely with professionals such as custom builders, architects, and construction lending specialist to navigate each step successfully.

Additionally, thorough planning and clear budgeting are essential to the success of a project as well as to avoid unexpected financial challenges during the construction process.

Building a New House On Your Existing Lot

Obtaining a construction loan to build a home on land you already own is a common scenario in the homebuilding process. This approach allows you to leverage your existing land equity to finance the construction of your new home.

Here’s a step-by-step guide on how to go about it:

 Evaluate Your Land:

• Begin by assessing the suitability of your land for construction. Check for any zoning restrictions, environmental regulations, or other factors that might affect your ability to build on the land.

Design Your Home:

• Develop a detailed plan for your new home, including architectural drawings, blueprints, and a budget. You’ll need these documents when applying for a construction loan.

Produce Construction Costs:

• Procure accurate proposals from your builder for the cost of construction. This should include materials, labor, permits, and any other associated expenses.
• If you’re working with a reputable builder, they should have a preliminary planning process in place.  This allows them to safeguard clients against unexpected cost once in the construction phases by fully planning and detailing your actual cost through contractors and supplier bids, material selection choices made up front, and other aspects that play a major role in the overall cost of a new home project.

Choose a Lender:

• Choose a lender who specializes in construction loans. You can approach traditional banks, credit unions, mainly local community banks.  Ask about interest rates, terms, and fees to find the best option for your needs.
• Check with your preferred builder/GC as they tend to have reputable lenders that they usually prefer to work with.
• Ensure your lender can provide your builder with an initial 10% draw payment so that they are able to procure materials and labor to start the project.

Loan Application:

• Prepare your loan application, including your credit history, income, and financial information. You’ll also need to provide your detailed construction plans and cost estimates.
• Understand that your lending institution will not be able to procure your loan until these official documents are available.
• If you are working with a reputable builder, they may have a preliminary planning process so that they can procure actual cost for your project before they are able to provide these final numbers to your lender and the loan.
• This greatly safeguards the clients against unexpected cost in a fixed price contract but can be affected by market changes such as interest rates at the time that the contract is approved and ready to send to the lender.

New Home Appraisal:

• The lender will typically conduct an appraisal to determine the current value of your land and the projected value of the completed home based on the provided plans, specifications, size, location, amenities nearby, and allowed comparable properties based on zoning. This helps establish the loan amount they are willing to offer.

Loan Approval:

• Once your loan application is approved, you’ll receive a construction to permanent loan. This is a loan that covers the construction period where payments are interest-only based on the draws disbursed.  This loan also includes a permanent loan option secured at the beginning of the project.

The Construction Process:

• Construction phases: The construction process typically occurs in phases, with disbursements from the construction loan made at each milestone. Common phases include foundation, framing, roofing, electrical/plumbing, interior, and final inspections.
• Regular inspections: Local building inspectors will visit the construction site at various stages to ensure the work complies with building codes and regulations.

Loan Disbursements:

• As the construction on your new home progresses, the lender disburses funds to cover the costs incurred during each phase of construction.  These are typically referred to as a “draw” or “milestone” payment.

Conversion to a Permanent Mortgage:

• Once construction is complete, the construction loan will convert into a permanent mortgage.
• The permanent mortgage will be set upfront when the projects begin.  Many times, you can look at additional permanent loan options with no penalty.

Final Inspections and Delivery:

• After all work is substantially completed and the final inspections have been approved by the local municipality, a Certificate of Occupancy will be obtained, and you are able to move into your new home based on the timelines discussed with your builder.

Ongoing Payments:

• You will begin making regular mortgage payments on your permanent mortgage, which will include principal and interest, property tax escrow, and homeowners’ insurance escrow.

Maintaining Your Home:

• Regular maintenance and upkeep of your new home will preserve its overall value, performance, and longevity.
• A newly built home often requires more routine care than older homes and your builder should be able to clarify what is needed.

Remember that the process of building a home via a construction loan on your land can be complex, and it’s crucial to work closely with professionals such as custom builders, architects, and construction lending specialist to navigate each step successfully.

Additionally, thorough planning and clear budgeting are essential to the success of a project as well as to avoid unexpected financial challenges during the construction process.

New Renovation/Addition Project on Your Existing Home

Renovating your already-owned home using a construction loan can be a smart financial move if you’re looking to make significant improvements or expansions to your property.

Here’s a step-by-step guide to help you navigate the process:

Evaluate Your Renovation Needs:

• Determine the scope of your renovation project and create a detailed list of the improvements you want to make. This will help you estimate the budget required for the project.

Check Your Credit and Finances:

• Review your credit score and financial situation. Lenders typically require a good credit score and a stable financial history to approve a construction loan. Make sure your financials are in order.  And you should refrain from making any large financial purchases or moves during these phases while trying to get financing assistance.

Research Lender:

• Look for lenders that our experienced with construction loan financing. Banks, credit unions, and specialized construction loan lenders are options to consider.

Meet with Lender(s):

• Schedule meetings with potential lenders to discuss your renovation project and explore loan options. Ask about the specific terms of their construction loans, such as interest rates, down payment requirements, and loan-to-value ratios.
• Check with your preferred builder/GC as they tend to have reputable lenders that they usually prefer to work with.

Pre-Approval:

• Once you’ve chosen a lender, get pre-approved for the loan. This involves providing documentation of your financial history, income, and the initial details of your renovation project. The lender will assess your eligibility and determine the loan amount that you qualify for.

Create a Renovation Plan:

• Work with your preferred builder and architect to create a detailed renovation plan and cost proposal. This plan will be used by the lender to evaluate the feasibility of the project.

Loan Application continuation of pre-approval:

• Submit project scope to your lender.  Include all required documents, such as your renovation plan, cost estimates, and builder contract information.

Appraisal and Underwriting:

• The lender will order an appraisal to assess the current value of your home and the anticipated value after renovations. The underwriting process will then evaluate your application and the renovation plan.

Loan Approval:

• If your application is approved, your lender will provide you with a loan commitment letter which should outline the terms and conditions of the loan, including the interest rate, loan amount, and the intended disbursement schedule.

Closing:

• Complete the loan closing process, which typically involves signing the necessary paperwork. You may also be required to pay closing costs at this stage.

Construction Begins:

• With the loan in place, you can start your renovation project. The lender will typically disburse funds in installments as the work progresses which are typically referred to as “Draws” or “Milestone” payments. The performing contractor will need to provide evidence of the completed work to receive the next installment.  Your lender will usually send an inspector out to ensure that the work has been completed.

Interest Payments:

• During the construction phase, you may only need to make interest payments on the loan based on funds disbursed as the project progresses. These payments are typically lower than full loan payments.
• Conversion to Permanent Mortgage:
• Once the renovations are completed, the construction loan is then converted into a permanent mortgage, which was secured at the beginning of the project.
• You’ll start making regular mortgage payments, which include principal and interest.  Other permanent loan options may exist with no penalty which offers flexibility.

Enjoy Your Renovated Home:

• Once your loan has been finalized, inspections are approved, and your builder/GC is ready for it, you will be able to move back into your home and start to enjoy all the hard work!

Remember that construction loans can be complex, so it’s essential to work with a knowledgeable lender who specializes in the kind of financing. Additionally, having a well-thought-out renovation plan and budget is crucial to a successful project.

Buying a House with New Renovation

Buying a home and renovating it through a construction-to-permanent loan can be an exciting and strategic approach to achieve the house of your dreams. This type of loan offers a seamless transition from the construction phase to the permanent mortgage, simplifying the financing process.

Here’s a breakdown of the key aspects involved:

Benefits of a Construction-to-Permanent Loan:

• One Time Closing: With this type of loan, you only need to go through one closing, saving you time and potentially reducing closing costs compared to having separate loans for construction and permanent financing.
• Interest Rates: Interest rates can be locked in at the beginning of the loan, providing financial stability throughout the construction process.
• Streamlined Process: The transition from construction to permanent financing is smoother, as there’s no need to re-qualify or go through additional approvals.

Buying a Home with Renovation in Mind:

• Property Search: Identify a property with the potential for renovation or consider purchasing a fixer upper.
• Budgeting: Work with a builder/GC to estimate the renovation costs as best that they can upfront to ensure that their preliminary “estimated cost” fits into your ideal and available budgets. Include a adequate contingency buffer for unexpected expenses.  And obtain true costs from your builder/GC once they have had the opportunity to price all of the work and included elements discussed through the preliminary planning process.
• Loan Approval: Get pre-approved for the construction-to-permanent loan, considering both the home purchase and renovation costs.

The Construction Process:

• Selecting a Contractor: Choose a reputable builder/GC with experience in the type of renovations you’re planning.
• Ask about their pricing strategies and process to ensure they align with your needs for true cost upfront.
  • Be wary of “cost plus” contracts. Especially if they are not fully detailed out prior to contract approval and starting work.
• Draw Schedule: The lender will establish a draw schedule, releasing funds at different “milestone” stages of the construction process.
• Inspections: Regular inspections by the lending institution ensures that the work meets the agreed-upon standards before the next disbursement will be made.

Transition to Permanent Financing:

• Automatic Conversion: Once construction is complete, the loan automatically converts to a permanent mortgage without the need for additional paperwork.
• Final Inspections: A final inspection may be required to ensure that all work has been completed according to the approved plans and specifications provided at the start.

Considerations:

Contingency Plans:

• Have contingency plans for delays or unforeseen issues during construction.
• Renovations always hold surprises!! It just depends how big those surprises are and what it takes to work through them.
• It is recommended to allocate approximately 10%-20% of the total budget to contingency for the unknown or unforeseen costs that could arise. Builders and GCs that work through a preliminary planning process to develop true cost will allow better piece of mind and could result in lower budgets here.  Better to safe and know that you have the funds available to you if the need is there.
• Below are just a few things that could come up after your project gets started:

• Electrical deficiencies can be found once receptacles and switches are opened.
• Mold and rotted studs are sometimes found behind walls, especially when you know there has been a leak at some point.
• Framing that’s incorrect behind walls (not adequate support or studs that are warped, twisted, or damaged otherwise.
• Walls that aren’t flat, and large (12×24) tiles are intended to be installed on them. If this isn’t corrected, you will have problems with tiles cracking down the road and uneven joints.
• Your dishwasher, microwave, or fridge are not on a dedicated circuit.
• Your exhaust fans are vented into the attic instead of to the exterior, or your fan is connected to a 3″ duct when your new fan requires a 4″ duct.
• Your drains may not flow properly due to grease buildup over the years. This may require a lot of snaking, reworking of drainage lines, or even replacement in some cases.
• Plumbing stacks, HVAC ducts, or other main utility connections may be located in walls, floors, or ceilings that other, new design elements are scheduled to be installed. In some cases, major redesign would be required to either move the utility (if able to) or work around it.
• Uncovered foundation cracks or other similar foundation repairs needed.
• Additional supports or footings that may be required for load-bearing wall removal.

Choosing the Right Lender:

• Work with a lender with experience when obtaining a construction-to-permanent loans to ensure a smooth process.

Timing:

• Make sure the seller of the to be renovated home can provide ample time for you to interview your builder/GC, create at least an estimated budget, and possibly even preliminary drawings as needed.
• In certain markets where activity is high and inventory is low, this may be very hard to obtain within the time that it could take to lose that house to another, competing offer.
• In these cases, you should hire your preferred builder/GC to join you at the proposed properties to provide instant insight on feasibility, difficulty or ease meeting your new design criteria, and even potential estimated cost on the spot.  Most builders/GCs will require this time to be paid for based on an hourly rate and is worth the expense if timing is important, and/or multiple properties are potential options.

Post-Renovation:

• Enjoy Your Home: Once your loan has been finalized, inspections are approved, and your builder/GC is ready for it, you will be able to move back into your home and start to enjoy all the hard work!

A construction-to-permanent loan offers a convenient and efficient way to finance both the purchase and renovation of a home. However, careful planning, selecting the right professionals, and working with an experienced lender are crucial to a successful and stress-free process.

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