It takes a lot of planning before you can begin construction on your 'dream house'. Here the goal is to provide guidance with easy to follow steps so the house building experience will be a great one you will want to talk about again and again. Leave that hammer right where it is for the time being and let's begin the planning.
Your first step will be to find out exactly how much house you can afford to build. If you already own a building lot, is it free and clear or do you have a loan out on it with an outstanding balance? Normally, your lender will pay off the outstanding amount of money owed on the lot so that it has a clear title. Your lender will place a lien on the lot and will want to be in first position. The lien will be the amount of money you borrow to pay off the balance on your lot and to improve the lot or construct your house.
From experience it is best to work with a lender you can physcially connect with. It's so much easier to work out any problem in person than over a phone or the internet. Psychologically speaking, I believe your loan officer will feel more of a commitment to you in person than on the phone thus the customer service will be superior.
Your lender will take your application for a construction loan, run a credit report, verify income, assets, and review construction documents you provide to determine whether or not you get the loan.
Now, you can handle the construction procedure two ways. You can informally meet with your lender to be sure you can qualify for the loan you need to begin construction on your house, and, feeling confident, work on getting your blueprints and other necessary documentation together before you make formal application.
Or, you can get approved and then work on all the construction documentation you will need. The problem with getting the commitment prior to having all documentation in order is that the rate you applied at may not be available in the time it takes to get all the docs together. It could take you 30 days or more depending upon how motivated you are.
My advice is make an appointment with your loan officer and ask to be Pre Approved for a construction loan.
Getting Pre Approved is the better way to go. This way you know exactly how much house you can afford to build and with that information you can begin planning. A Pre Approval usually shows a range of interest rates you have been preapproved at. For instance, your lender's findings from their underwriting software will tell them that you are qualified up to one percent above the interest rate indicated on the Pre Approval. If rates should go up you know how high they can climb before your Pre Approval is no longer valid.
Now is the time to pick a builder/general contractor who will complete and coordinate the construction of your house. Your lender may require a copy of your builder's certification or license and insurance. It is very important that you and your builder understand the terms of your lender's construction program so that the process can continue smoothly without costly delays.
With a loan amount in mind, you can choose a plan for a stick built house or purchase a somewhat customized modular home. Modular homes are stick built in an enclosed factory off site then transported to the borrower's lot to be placed on the foundation and finished. It takes a lot less time to put up a modular home than to build a traditional stick built house. The biggest advantage with a modular home is you should be moved into your new house within 90 days of closing your loan, weather permitting. A stick built house can take six to nine months, or longer, to complete upon closing of your construction loan.
When it comes to acting as your own general contractor, there are a few lenders who may allow that. You will have to prove you have experience in one of the trades but in the long run it will save you money. You may have a family member or friend who can act as your general contractor. Just be sure everything is spelled out so you and your builder have a clear understanding of what each parties responsibilities will entail.
Once you have settled on a builder or general contractor, you will need to work on getting the following items together for your lender.
To initiate the mortgage process you will need to bring to your lender,
- a legal description of the property and proof it is a legal building lot
- a fully executed purchase and sales agreement for the land or proof of ownership
- a copy of the contract with your Builder/General Contractor
- Evidence of source of funds to close and for down payment if needed
- copy of blueprints, plot plan, specifications, and your builder's preferred cost breakdown for the disbursements
- Current pay stubs
- Current checking and savings statements
- Current W2 and 2 years complete income tax returns if you are self employed or commissioned
- a check for fees: application, appraisal, credit report or rate lock, whatever your lender requires
- Any other information your lender needs to complete the application
Upon approval of your loan your lender will be looking for a Building Permit and any other zoning permits required to begin improving the property.
Once your loan has closed, construction can begin. As work progresses on the property and your builder is looking to get paid, you will contact the lender to have a Construction Inspector review the work completed in order to have funds disbursed. The builder will provide you with invoices of all work completed which will include labor and materials. This information along with a Mechanic's Lien Waiver signed by all parties who have worked on your house will accompany the invoice to the lender. The lender reviews the report from their construction inspector and all invoices and lien waivers and makes a decision as to how much money will be released to cover expenses. This process may be slightly different in each state but overall should be pretty similar. The lien waivers tell the lender that none of the sub-contractors nor the builder/general contractor have placed a lien on the property thus insuring the lender's position on title.
During the construction phase you pay only the interest on the money that has been disbursed. For instance, if you have only requested $26,000 to date, your interest payment is based on that amount, not the entire loan. You pay only the interest on what you have used to date.
When your house is 100% complete, the building inspector in your area will inspect the property to be sure all was done and finished within code of your city or town. A Certificate of Occupancy will be issued and with that in hand you can go to your lender to get your final disbursement of funds, pay off all the contractors and move into your beautiful new home.
Usually the lender will have you sign a modification agreement to change your first payment due date and the maturity date of your mortgage to be recorded at the city or town hall at a small charge to you. This step actually changes your construction loan into the permanent mortgage thus you will begin making regular principal and interest payments.