This article will discuss "Interim Financing"!
Much Money Do You Need?
Before you begin the search for a lender, you will need to have some idea as to the amount of money needed for your construction needs. Take your drawings to several different contractors (at least 3) and request an estimate. You might also find a real estate appraiser and get an appraisal on the value of your home after construction is completed. These will help you in determining the amount of money you need for your project.
Your lender will probably have an appraisal done too - they will use it to determine the amount they are willing to lend for construction.
If you are building in the country, be sure you include things like water lines, electricity, telephone, septic systems, and excavation for a driveway in your total project cost.
If you are building within city limits, check with your city offices to determine what permits and inspections are needed and the cost for each. All of these items can be covered by your interim financing.
Interim Financing is a construction loan for the purpose of building a new home. Remember that this type loan is a reimbursement loan and not an advance. At the end of the construction period, the lending institution will receive payment in full from your mortgage company for the amount expended.
You will want to check with the various financial institutions in your part of the country to determine the length of time allowed for your interim financing loan. It can range from 6-12 months or more and usually begins on the day you sign the loan papers.
While searching for a lending company to handle your interim financing be sure to ask about their requirements before approving your loan. Some will require a licensed general contractor be responsible for your construction.
This will mean that you will not be able to act as your own contractor unless you have a personal friend who is willing to place his license in your hands. If the construction is not completed by the end of the loan term, the loan is in default and the general contractor is responsible for repayment of the loan and could possibly have his license pulled by the state board.
Don't give up too quick though. Banks and Credit Unions are becoming much more open to the built by owner process and if you have a good credit rating and prior history dealing with a particular bank or credit union, give them a try.
The one thing you most likely will be required to have is a clear title to the land/lot you plan to build on as the lending institution will use it as equity for your construction loan.
Also, you might want to try to locate a construction-to-permanent financing program which allows a construction loan be converted to a mortgage loan after the home is completed. There is of course the advantage of only paying for one application fee and one closing cost.
When you have secured your interim financing (construction loan), you and the lender will establish a "draw" schedule based on the various stages of construction.
For example, the lender may agree to a draw when the foundation has been completed. Another draw when the home is in the "dry" (all doors, windows and roof installed).
Every time you make a "draw", the lender is probably going to require statements or bills showing who the money is going to and for what phase of construction.
Check with your lender on how they will handle deposits for things like custom cabinets which are usually built in a shop and then brought to the job site.
There may be other items that will require a deposit and if so, you need to know if the lender is willing to release this money prior to install of the item. Interest on your loan is charged against the amount drawn throughout the term of the loan.
If you are the general contractor, keep a record of all receipts and
out-of-pocket money as well as keeping the actual receipt. It is much easier to control your budget during construction if you have a spreadsheet you can look at quickly to see how your money is being spent.
Speaking of budgets, you should establish one for each phase of your construction process so you don't run out of money before the project is completed.
For instance, establish a budget for the major construction phase, beginning with the foundation through the in-the-dry process. You will also want budgets for light fixtures, floor coverings (carpet, tile, hardwood, etc), appliances, plumbing fixtures, air-conditioning and heating systems, cabinets, paint, wallpaper, etc. This will assist you in keeping your spending under control.
If you know you have $5,000 for a particular budget and you are able to cover it with $4,000, then you will have extra money for another area.
Do some window shopping at Lowe's or Home Depot to get an idea of the cost of the appliances you want in your new home. Check out the lighting and plumbing fixtures as well as carpeting, ceramic tile, hardwood flooring, and other items. You will have a better understanding of the cost involved for each phase of construction after seeing the prices yourself. Take a tablet and make a note of each item and its cost. You'll probably be surprised at how fast your budget is depleted.
I hope the above article has helped you toward completion of your dream home!
Our next article will cover the start up of actual construction of your dream home.
Article by: Ellen Mayo
Your Dream Home