What is a Construction-Perm Loan?
Construction Permanent loans generally consist of two types of loans. The first being a temporary Construction Loan and the second loan is called the End Loan or Takeout loan.
In most cases the construction part of the loan is given for the term of 6-12 months depending on the lender and builder needs. The end loan or take out loan is the permanent loan, which is normally given for a term of 15-30 years.
The construction part of the loan funds the building of the home in stages and the end loan pays off the construction loan.
To apply for a construction permanent loan you would need three items to get started.
-Blue prints (supplied by the architect/designer)
-Builder specification list (specs) (Which is a list of all building materials and estimates supplied by the builder)
-Land (lot)
This information is given to an appraiser to determine a projected market value after the completion of the home. Even though there will not be a completed property yet, the appraiser can determine market value based on the three items above.
How Much of A Down Payment Do You Need?
5%-10% down payment will be required based on the appraised value and depending on credit scores.
Once we receive the appraisal, order credit reports and collect the appropriate paperwork, we can submit your loan package for approval. Usually within 30 days after filling out the Loan Application, you could 'break ground' and start construction.
There are normally two closings. The first closing is for the construction part of the loan and the second closing would be for the long term (15 or 30 year) end loan.
(Tip) Be careful though, because with two loan closings there could be two sets of closing costs. This can amount to thousands of additional closing costs paid. You want to avoid this.
How Can We Avoid Paying Closing Costs Twice!?
Rateseekers.com offers construction permanent loans that only require you to pay one set of closing costs. Paying a Modification Fee of $250 will allow you to transfer your construction loan into a long term end loan. And instead of having two banks doing each loan separately we will fund both loans through the same bank modifying all paperwork from the construction part of the loan into the permanent loan.
Normally there are five partial draws during construction. The first is given at the first closing to the builder, usually 10%-15% in advance based on loan amount. The next sets of draws are dispersed in 10-20% increments, (based on loan amount) depending on the banks draw schedule. Just before a dispersal, the banks requires that a certain stage of construction to be completed and verified by an appraiser before they will release the next draw. The first draw would be for pulling permits, paying fees and pouring the slab. This stage must be completed before the bank will release funds for the next draw. The next draw would be for the installation of all exterior walls in order to get ready for the trusses and so on.
Can We Ask the Builder To Pay The Interest Payments During Construction?
Also, you will have to pay interest on the funds dispersed during the construction period. That means that not only will you be making your regular mortgage/rental payments on the home you currently reside in; you will also have to budget yourself to pay the additional interest on the construction part of the loan during construction. On the average, interest during construction, as a rule of thumb, will amount to a total of 2% of the loan amount, so budget accordingly. (Or prime rate plus 1.5% amortized over 30 years on the funds dispersed ONLY).
(Tip ) You may be able to negotiate with the builder to pay the interest during construction. But only try to negotiate after you know the builders bottom line on purchase price because he will just roll the 2% Interest into the sales price. Especially if you ask him to do this at the beginning of negotiations. Either way, this strategy is an excellent way to save cash-out-of-pocket for borrowers.
Don't be upset if you don't win at this because some builders believe they do not have to negotiate price when it comes to new home construction. As with any type of negotiations it all depends on seller or buyers motivation. If the builder has a very good reputation in town and he/she is known for outstanding quality and workmanship it may be worth paying him/her top dollar.
Do Construction Permanent Loans Cost More?
Please keep in mind there are other additional closing costs expenses that are associated with a construction permanent loan that you would NOT have to pay if the home was pre-existing.
Administration fee for additional lender processing services of $250.00
5 Inspection fees @ $50. The lender requires the appraiser to review the completed construction stages in order to release each draw. $300.00
Modification fee of $250.00 (instead of another set of closing costs..huge savings)
(Tip ) It is probably important to note that if you can hire a private building consultant with a General Contractors license to review and approve your builders work. It will be money well spent. The appraiser will not verify the quality of the workmanship; they are only to report to the bank that every stage has been completed. The county inspector will come out to inspect the property for code violations during the construction stages but will not report whether the builder is cutting minor corners. Its just a good idea to have a qualified neutral party on your side representing your best interests if it is financially possible for you to do so. It will be money saved in the long run I can assure you.
If you cannot find or afford a private building consultant make sure you visit the construction site yourself weekly, if not more. Pick up a great book called, The Complete Guide to Contracting You Home by Dave McGuerty and Kent Lester. Another good book is Build your Dream house for Less by R. Dodge Woodson. Both of these books are geared towards being your own self contractor and act as your own builder, however they will give you step by step information on the building process. Enough information that will allow you to use common sense to inspect poor workmanship. To quote one of the authors, he says, It may take 10 years to learn how to lay brick correctly, but 10 minutes to learn how spot incorrect brick laying.
When Should We Lock In Our Interest Rate?
Finally, the day comes when construction is almost completed. Hopefully within 12 months or less. You will order your close out (CO) from the county inspectors office to come out to the job site and sign off on the project.
If you time it right, approximately 30 days before the completion of the home you should start to follow the interest rate market and lock into an interest rate.
(Tip) If you lock into a 15-day rate lock rather than a 30-day, you may receive a lower interest rate.
Finally, lock into an interest rate for your end loan and modify all the paperwork for the 15-30 year term loan. You'll be required to come into the title insurance office again to sign additional paperwork and receive the keys to your brand new dream home.
Enjoy!
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