Construction Loans: What They Are and How They Work (IN DETAIL)
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- Опубліковано 4 жов 2024
- When financing the building of your own home, you have a few options. This video breaks down what construction loans are and how they work, including the different variables involved.
If you want help financing a property in Washington or Idaho, we love helping people wherever they are at in the process!
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So helpful for someone who hasn’t done this before. Thank you! 🎉
Super!
This was a very informative video, thank you for the in-depth explanation!
Thank you! Glad to hear.
Excellent excellent video…straight to the points !! Excellent what I needed!
Thank you!
Great video, here in the Northeast and as an Architect we see a lot of municipalities around $15 dollars per thousand for permitting. For Architectural drawing fees for mid-range but still custom, prices very a lot but you could start with 7%-15% of the construction costs. This range is usually directly connected to expectations from the client as well as quality and specific region. For improved land, I think $350k in a desirable area is a good starting point too. Thanks for your expertise and detail.
Super helpful info. Thank you!
Can you provide more details on how exactly we can combine land & construction loan and the approval process for that (using construction loan to finance the land purchase)? Most of the reason people would purchase land is to build I assume.
Hi Jean. It’s doable in theory but difficult in practice. In order to finalize (close or fund) a construction loan, you have to have a contract to build, plans, specs, permits, detailed cost breakdown, etc. practically speaking, it is difficult to do all that before owning the land, mostly because it requires a big investment of money and time to get all of that in place. Requires very patient and cooperative land sellers. Happy to jump on a call to answer additional questions. 206-999-6941
Very informative and detailed, thank you from Canada.
This video was very helpful, thank you.
You bet! Thanks for letting me know
Very well detailed and really helpful. Much appreciated.
Thank you
Correct me if I'm wrong...but this sounds like you can be 175k in the hole on this deal...and come out with nothing. You put all this money and work into the land and planning, but the lender can just say No, and you're stuck. Did I miss something?
Hi. Thanks for watching. I think you have precisely identified the risk of doing too much before you get lender preapproval. Some risks are inevitable since you do have to spend money to get to the point where your proposed project can be appraised (architecs, plans, etc)
@@MortgageMasteryTheater I understand risk is a big part of a build. But the part i have a problem is: I can't get any solid numbers before spending cash. For example, I have a half acre picked out (my mother is selling it to me cheap). I have a house from ValueBuilds picked out (with a baseline estimate, without customizations. And a pre approved 300k loan. I've lined up as many dominos as I can. BUT...no one can tell me how much the house will be with the customizations i want (that are options on the prebuilt plan), or how much it will cost to prepare the land. Once i have more defined numbers, I have no problem going all in on this. But I can't seem to get more than "welllllll lets see what happens."
@@Winterborn5 Don't know how many builders and subs are in your area. Hopefully you can find someone that can provide a reasonably reliable estimate. Best to you.
My lender said no the first time, we were crushed but we are self employed so knew there’d be an issue in spite of our great credit ratings. I’ve had to wait another 6 months but now we are finally ready to move forward and yes, there’s been serious out of pocket cash getting it to this prepped state, and having all the planning in place. It takes more than you realize until you get into it by experience. You may be slowed down but you still have equity in your land and a future canvas for when you are ready. Definitely talk to a banker through out the process if you can start a relationship with a lender in advance. If they know you are being pro active, it’s helpful. Having everything prepped…your blueprint plans, pad in place, if you can get your utility box put in first, your well, if it’s raw land in advance, you can use it towards your equity and the value in the land goes up as soon as you do that.
You can roll the land loan into the construction loan.
EXCELLENT INFORMATION
TY
Thank you!
Great info, thanks.
You're welcome!
Let me know in the comments if there were any questions you have that I did not answer in this video! Reach out to me directly using the details in the description - happy to set up a call and answer questions.
Great info.
I have a 5.5 plot I’m looking to develop. I would like your advice. It’s owned free and clear. It’s a view lot with slopes and a small existing pad which is like to expand.
Electrical at my neighbor’s boundary 350 feet away to mine. (From there 550 feet to the proposed house site. And the wellhead even further away)
I’m looking to possibly self fiancé all the lot prep and attendant soft costs
Leaving the house build as the only part of the expense to be financed through loans. Is this a good strategy?
I worry about the slope and park test. Also the 350 feet from my neighbors driveway to mine would have to be paved for the fire trucks as it’s more than 20% slope
I’m in California’s LA county. A 1600-1800 sqft home would be sufficient size for my aspirations.
@@yotube1ful Thanks for the question! Providing a comprehensive answer is more than just a financing question in terms of specific construction elements. That said, the more build-ready your lot, the easier it will be to finance as different construction lenders have different tolerances for undeveloped or partially developed lots. I would be happy to refer you to a good construction lender in your area if you are interested.
Hi, thanks for the video! I was wondering how the process might change for an fha loan or a usda loan? Thanks!
@@beepboop533 Thanks for watching. I am not aware of any USDA construction loans. Fha has what is called 203k loans, for miner and major remodel work. I don’t have much experience with these but happy to find you someone who does.
We do have some savings to pay off the land. Do you recommend paying off the land or saving up for a down payment to build?
Hi. Thanks for watching! Hang on to your cash as much as possible until you connect with a lender about your project. Cash can really impact the overall qualifying and deal structure. You’ll probably need some for soft costs (plans and permits) before the loan is approved. Go to mortgagematchup.com and find a great mortgage broker in your market. Make sure they have construction lending experience. Blessings.
Well explained thank you
You're welcome!
Do you know what happens if the builder doesn't finish the job in the year timeline the bank gave us? Thanks
This will be different with every lender. Check your loan agreement - it will be stipualted. You could lose your lock (assuming if was a guaranteed rate at the time the loan rolls over to a permament loan). Best case I suspect there will be additional fees involved.
@MortgageMasteryTheater I kind of made the mistake of signing the contract with the builder and not getting my copy right then and there. He said he was going to print it out and make me a copy. I know when we signed it he said he'd finish in a year. I know that's what the bank has but I'm not certain if the bank communicated that with him or if that's all on me. In fact I have very little clue what the bank and the builder discussed or was mandatory. I may have made a mistake. Live and learn I guess
@@stylicho You never know. It may be very generous. Check in with your bank tomorrow and get a copy of the loan agreement. And ask the lender what happens if you need an extra month or two.
@@MortgageMasteryTheater And worst case?
@@robinswebmail Not sure. Perhaps call your loan.
Do you have to start paying on a construction loan as soon as it closes or is it when the construction is done ?
You generally make interest-only payments on the distriubuted portion of the loan during construction. Plus taxes and insurance.
We own our land in Georgia. Borrowing 120,000. House has appraised at 297. It's a small town bank and it's been going ok so far. We are our own builders. Is it OK if we find our own mortgage company that isn't connected to this bank? We have a company that we were pre-approved through when we were just going to buy and we really like the guy that we were working with so we want to use them for our permanent mortgage.
Hi Rhonda. Thanks for watching. That all depends on the terms of your construction loan. Some are what are called "one time close" or "one step" construction. These will automatically roll into the permanent loan with no refinace required. Some are fixed rates some are variable then become fixed at the roll over point. If you don't have this type and are required to get a new loan at completion, you should find out if there are any incentives your construction lender is offering or any penalties for not rolling into their loan. Beyond that, I can't imgine you would not be allowed to take the permament loan with your favorite guy. Feel free to call if you have questions. 206-999-6941 and please subscribe to my channel. Thanks again!
@@MortgageMasteryTheater It's a fixed rate with a maturity at 1 year
@@rhondastill2624 Got it. So, does not sound like a one-step construction loan. I imagine your buy will be able to provide the permanent financing. I would just check with the construction lender to see what incentives they offer to keep you. That said, a good indpendent mortgage broker should be able to provide better pricing.
So basically you have to be at millionaire status…
Got it
It definitely helps but I have helped sub-millionaires do it as well. Thanks for watching!
Nice work
Thanks!
How would the process for financing differ for a spec build by a general contractor?
Hi Samuel. You would need to inquire of individual banks. Spec lending is very similar structurally (project, contractor and borrower approval process) but the lending terms will be significantly different - especially with regards to down payment requirements. Best just to get the directory of local lenders and call them all.
is it better to pay off your land or include it into the construction loan ?
Probably indifferent from a lending standpoint. If you have a good rate on the land loan and are using the cash well in the interim, sit tight. If the cash is doing nothing and the loan is costing you, pay it off now.
Great informational video! If you were to buy a house with two lots, and plan to develop the other lot without the house, could you take a residential mortgage on the original home (3%) then take a construction loan out for the plans on the other lot?
Thank you Cole. If you financed the purchase of the house and land combined, you would need a lien release from the lender to carve out a separate buildable lot. Once you have a separate buildable lot, you could do a construction loan.
Can I use a Heloc on my current hime for any out of pocket expenses on building my new home? I own the land outright and have much more equity in my current home than it would take for out of pocket expenses.
Helocs are generally unrestricted in terms of what you can use them for, so I would expect you could. You just want to have a plan for the long term funding of the new home as you generally don't want a large balance on a variable rate heloc. Perhaps you will sell your current home or refinance the new home when it is complete.
@@MortgageMasteryTheater Thanks. I plan to sell my current home once the new home is completed. That would allow me to pay off the HELOC and put more money towards the new home.
If I buy a seller financed lot, let's say it 200k and I put 20% down with a 30 yr amortized loan with a balloon payment in 5 years. Will lender for a construction loan require me to pay off the seller financed loan before it an build?
More than likely but these are not uniform products and it never hurts to ask each lender based upon your specific circumstances.
Can you have the pre-loan costs reimbursed back to me once the construction loan is approved, that is can I have the costs incorporated into the construction loan to pay out to myself? Thanks, currently looking at land in Kitsap County.
Generally yes but there are strict documenation rules about prepaid expenses and they have to be included in the total cost breakdown and other documents. Happy to discuss your specifics if you want to jump on a call. 206-999-6941.
Great video, really helping me learn about this process. My wife and I have already purchased our lot (3 acres - $58K) and own it free and clear. The lot has tripled in value since we bought it about 4 years ago. Our current home which we've been in for 15 yrs is a VA loan (currently have about $400K in equity). We are looking at roughly $650K for the new construction. My question is with regards to my VA certificate and it's use for a Construction Loan/new mortgage as we don't have the cash for a conventional down payment. We have a good bit of equity between the land and current home, so do I need to sell and pay off my current home in order to free up that VA cert? We don't want to have to sell a year early and incur an interim move in order to free up the VA Cert.
Thanks Randy! Some lenders will allow you to do a constructioin loan with new VA loan assuming the sale of your current home once construction is completed. This is a lender by lender decision so best to address specifically with yours. Probably worth calling around if you get a no from your first choice
I don't know if there are any restrictions on a VA loan, but have you looked into getting a home equity loan on your current property? You can then draw down on the HELOC for cash. The HELOC is paid off from the proceeds of the sale when you sell the house. You would have the additional interest costs, of course, on the HELOC (that is, the portion of the line of credit you use).
@@accuratecalcs yes that is the route I’m thinking about going… use the equity I have.
How about buying house that has big land can someone can get construction loan living in old house when building new house?
As long as zoning and permitting are good, should be fine.
I have a question, I own a 2.5 acre lot and I was interested in using a construction loan to build on it but I got to thinking about the ability to buy land with the loan to. So say I was able to convince my neighbor to sell me his 2.5 acre lot, can I theoretically use the loan to buy that land add to mine to make 5 acres than build on it all in one construction loan
Hi Christian. Possibly. You can use a construction loan to buy land but that land generally must be buildable at closing. You may need to formally join those two parcels together into a single lot to be able to finance the purchase with a construction loan. Probably something that could happen simultaneously with the closing of the construction loan. Different states / counties will have different procedures for joining lots together so its hard for me to say what it would look like in your case. Happy to refer you to a good mortgage broker in your area .
I'll see if I can find a good referral for you. Email or text me your contact info. I won't share it with anyone unless you ask me to. Just for me to inform you of what I learn,
chris@clevelandstreet.com. and 206-999-6941
Ok. Found Nate Perez of LEN Financial Services in Fort Meyer. He has construction lending business and took over the mortgage business from his dad. His number is 239-699-8982. Good luck.
What states do you deal.with?
Hi Mary. I am licensed in WA and Idaho. I can refer you to a good lender anywhere in the US. Happy to discuss your specific scenario anytime.
@@MortgageMasteryTheater can you send a couple construction loan lenders?
Looking at property with a small house on it and would like to build a larger house (if snoho County agrees) but keep the small house. All while living in my existing house on a different property...
@@jessemagruder Hi Jesse. Happy to discuss with you. I am licensed in WA and ID. I am available in the morning tomorrow.
What if I still have a mortgage on my house and I want to demolish the house and rebuild it . Can I still get a Contruction loan to rebuild it ?
The short answer is probably but... I guess there isn't a really short answer. Regarding contstruction loans, most lenders have very particular requirements when it comes to tearing down and rebuilding. Some will only do so if the foundation is all that is left so just be clear with your lender about the extent of the tear down and rebuild. If the lender will do it, the new loan amount must cover the payoff of your current mortgage plus all your construction needs. The payoff of the current mortgage will happen with the first draw of the new construction loan at closing. In addition, any cash that is expected to come from you for the entire project will need to be paid into the construction escrow at closing (up front). Then, be sure to inquire about how your living costs during construction will impact your qualification. Many lenders will ignore these temporary costs but you need to ask the question.
@@MortgageMasteryTheater , thanks 🙏 a lot . Do you have any videos on how to get a rehab loan?
You will not get a construction loan without a general contractor. Banks are crooked. You are a liar.
Thanks for watching Ricky. I agree with you about the need for a general contractor. I don’t recall suggesting otherwise in this video. Thanks for the opportunity to clarify if i did.
@@MortgageMasteryTheater We did our house as owner builder - but had a lot of skin in the game (50/50). I would not discourage anyone from trying to get an owner/builder loan. I think the biggest drawback is that you really really need to get a good handle on the build cost as you are borrowing the money up front.
Great video.
@@JamesLandolt-m1e Thank you. Great to hear. Love to know where you got your money (community bank, national big box bank, local broker? Also, what were the most important things you did to get the lender comfortable? What kind of experience did you have to demonstrate ability to manage the project well? Looking forward to learning more.
@@MortgageMasteryTheater It was a regional Bank in PA and the house was in NVA. They were our construction lender on our first house. We had a contractor who skipped after the first draw of 10% and the bank declared that we were now an owner builder. We finished the first house - although it took a year and we had a 6 month construction loan. We built our present house after buying a lot in a more upscale community but could not find a builder we would trust to build a birdhouse (I used to say doghouse but I think even that would be too challenging for them). That's why I responded as I would not want to discourage anyone from doing this. Builders build for money but an owner builder builds for love. This is not rocket science. The lot was worth more than the construction loan, our income and credit would have justified a much higher loan and we had to cash to upfront the start of the build as the bank gives you the draws in arrears. They needed to see signed, notarized lean releases from the subs before they would cut the draw and the subs needed to be paid before they signed the releases.