Frequently Asked Questions - Building

A construction-permanent mortgage is both your construction loan and long term mortgage combined into one loan, which means you only have one closing for both your construction loan and your long term mortgage.  This saves you time and money.  Best of all, with this type of construction loan, your interest rate is guaranteed up-front, which means that you don't have to lose sleep over what happens to interest rates while your home is being built.  You have peace of mind knowing exactly what your interest rate and monthly payment will be.

A construction-only mortgage is just that.  It is a short term mortgage that provides financing for just the construction period.  Your end loan (permanent long term mortgage) is taken out upon completion of your home.  Your construction loan and end loan are two separate loans, which means you have two separate costs and generally the interest rate for your end mortgage is NOT guaranteed until completion of your home.  At First Place, we do not offer these loans due to the increased interest rate risk and higher cost associated with these loans.

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What are my payments?
Your monthly payments are interest only and are billed on a monthly basis.  The amount of interest you are billed is based on the actual amount your builder has drawn against your construction loan.  Your payments will gradually increase as your builder draws funds toward the completion of your home.  You will only pay interest on the actual amount borrowed and for the actual period of time it was borrowed for.  This ensures you do not pay interest for funds that you did not use.  Interest only payments help to keep your total costs during construction as low as possible.

In some cases you may be eligible to finance your interest payments as part of your construction loan.  This allows you to have no monthly interest payments during construction as your payment is withdrawn from the funds available as part of your construction loan.  Contact us for all the details on this program.  

Your full monthly payments (both principal and interest) will begin once your home is completed and your mortgage converts (construction permanent mortgage) to your permanent mortgage.  If you desire an escrow account for taxes and insurance, it can be added to your monthly payment at this time. 

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What will my interest rate be for my loan?
With a construction permanent mortgage, the rate for both your construction loan and permanent mortgage are locked in at the time you close your construction loan.  Because you close on both your construction loan and end mortgage at the same time, you have the peace of mind in knowing what your rate is, and, best of all, you only pay one set of closing costs.  If interest rates at the time your home is completed are lower than the interest rate on your construction loan, you can pay a small fee to have your interest rate reduced.  This option is only available once your home is completed.  With this float down option you can have your cake and eat it too! 

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What will my cost be to take out a construction loan?
As with the two different options, there are two different sets of costs.  Generally, closing costs for a construction permanent mortgage are lower than those for a construction only mortgage.  With a construction permanent mortgage, you close one time - saving you time and money.  With a construction only mortgage, you have two separate closings - which increases your overall costs.  To best serve our clients, we offer only construction permanent mortgages.

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Can I build my own home if I don't have a license?
As a general rule, we will allow you to build your own home if you are reasonably qualified to do so, and your financial position would warrant your ability to do so.  Because building your own home can be more challenging then what most clients expect, we often times we suggest that meet with a owner-builder consultant such as U Build It.  Companies such as U Build It are a natural fit for those homeowners desiring to build their own home.  Please call us for details. 

If you are a licensed builder who builds homes professionally for a living, there is no problem, we will not treat your loan as a self build project.   

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Can your programs be used to finance major remodels or even a "tear-down"?
Yes, in these cases the amount which can be borrowed is usually based on the future value of the home after the construction is completed.  Most of our programs allow you to borrow up to 95% of the home's value upon completion.  Most of our programs allow you the opportunity to purchase a home and complete a remodel at the same time.  In addition, you can also use our programs to complete a major remodel or tear-down of a home you currently own. 

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Should we pay off our lot before we apply for a construction loan?
There is probably no reason to pay off your lot loan prior to the construction loan.  If you have a lot loan, the new construction loan will pay off that lot loan just like any refinance would.  The lot and the new improvements constitute only one piece of real estate, and the lot loan has to be paid off so the bank ends up in a first lien position.  If you pay the lot loan off prior to applying for a construction loan, you may be handcuffing yourself by putting too much cash into the deal.  Construction loans are almost always "no cash out" loans, so it may not be possible to get this cash back on acceptable financing terms.  You are often better off having cash on hand during construction to handle upgrades and changes. 

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Do we need to sell our current home before building a new home?
In terms of qualifying, most of our programs allow you to qualify for a new construction loan without having to sell your current home first.  This means that we typically do not count your current home payments against you when we qualify you for the new construction loan.  However, in many cases, your loan will be approved with the condition that we receive proof your current home has sold prior to your loan being converted or refinanced into your end mortgage. 

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When do we have to make our down payment?
The majority of the loans we do are construction permanent mortgages that have one loan closing.  At the time we close on your construction loan, you will have to furnish your down payment at that time.  For example, if the home you are building costs $200,000 and you will only be financing $100,000, you will need to furnish your $100,000 down payment at the time we close your construction loan.  The $100,000 down payment is held by the bank and is used to fund your builder's draws.  Once we have exhausted your funds, we will begin to fund the builder's draw requests from your construction loan.  There is no interest paid on your down payment. 

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Can I get a construction loan for part of the project and finish the work later?
No lender will enter into a deal where the end result is an unfinished house.  You could leave items such as landscaping, a swimming pool, finishing a bonus room, a security system, ceiling fans, and a garage door opener out of the build.  However, you cannot leave out items such as cabinets, floor coverings, or a driveway.  In addition, all items that were included as part of your plans and specifications will need to be completed.  In other words, you must build a minimum of what you disclosed to us you were going to build.  If you build less that what was disclosed, your loan amount will be adjusted down in most cases and there may be serious problems with the bank and building inspector. 

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Can we start construction with our own funds and get a construction loan later?
Yes, however, there are some things to keep in mind.  All lenders require a clear title, and this situation can be thought of as a title problem.  To issue title insurance, title companies will require indemnification agreements to be signed by contractors and subcontractors who have already done work.  This is to protect against mechanics' liens taking priority over a lender's first mortgage lien.  As long as your builder can provide the necessary documentation to the title company, we generally do not have a problem with customers who have already started their home.

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Can we use any builder?
Yes, however, we do require that your builder complete a "builder approval application".  We will check for "happy homeowners" for whom the builder has completed similar projects and vender references to ensure they have a good history with the builder.  We will also run a credit report, checking in particular for IRS liens.  The IRS can seize a builder's assets and accounts in cases of severe delinquencies.  This could bring your building project to a halt.  The bottom line is that the builder approval process is not only good for the bank, it is good for you.  Most builders will likely be eligible under our approval process. 

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How many draws can my builder get and where does the money go?
Again, the answer depends on the builder and the builder's proposed draw schedule.  A rule of thumb is that we typically do not like to do draws at less than 3 week intervals, but nothing is cast in stone.  If frequency of draws is a hot issue for your builder, we can usually handle the arrangements.  As to where the money is sent, it is usually wired to the title company who will disburse the funds to you or your builder depending on your preference.  We do require your signed authorization before releasing any funds to your builder.  In addition, we will not allow the builder to draw funds for work and/or items that have not been completed.  We will have the appraiser inspect your home each and every time the builder request funds.  What the builder is requesting funds for must match up with what the appraiser says is completed. 

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Can we pay our loan balance down at the end of our construction loan before our loan flips over to our permanent mortgage?
Yes, you can.  A common occurrence is that the borrowers have now sold their previous residence, and they wish to use some of these funds to buy down the construction loan prior to the loan flipping over to their long term mortgage.  You can make a principal payment of any amount, we will apply your payment and "re-calculate" your payment on your permanent mortgage for you. 

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If we already own our lot, how do we determine how much we can borrow?
Generally speaking, you will almost always be able to borrow a percentage of the future value of the house, regardless of how long you have owned the lot or the total costs to build.  Since new construction almost always appraises for more than total costs, this often works in your favor.  

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