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New Home Construction Loan

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New Home Construction Loan
A construction loan can be automatically converted into a long-term mortgage on completion of construction of the house. This article takes you through various aspects of construction loans and throws light on the loan application procedure.

Construction loans are not easy to procure as traditional mortgages. The terms, rates and fees may differ widely. A construction loan is generally a short-term and interest only loan. Such a home construction loan is usually replaced by a regular mortgage on completion of construction. Find out how a loan application procedure works.

Types of Construction Loans

All in one construction loan is a rollover loan. This loan automatically reverts to a standard mortgage on completion of construction.The advantage of this type of home construction loan is that the application process is simpler as it automatically turns into a regular home mortgage. Besides costs such as recording the mortgage, title search on property and other processing fees are paid just once. Besides such home construction loans usually have low or no upfront fees.

The construction-only loan becomes due for payment on the completion of the construction. At this stage, it must be decided whether it is going to be paid off or replaced by a conventional mortgage. Some consumers prefer the construction-only loan as it offers flexibility to choose the best mortgage deal when the home is ready. Construction loans are paid out in various stages of construction. These stages typically include:

  • Grading of site and pouring the foundation

  • Framing of the house

  • Plumbing and Wiring installation

  • Exterior completion

  • Installation of interior surfaces

  • Installation of cabinets, fixtures and trims
  • Painting and other interior finishes.

New home construction loan

Construction loan companies differ in their lending patterns. Mortgage lending is based at maximums of 80% to 90% of current value of the property. If you already own the land on which you are going to construct the house, you are likely to get some equity on the new construction loan. Construction loan lenders use estimated future value of the property to compute the amount of loan that can be sanctioned. The cost of the construction project also plays a determining part. Construction to permanent financing involves automatic conversion to mortgage loan on completion of construction activity.

Once the certificate of occupancy is furnished, the construction loan moves into the mortgage-financing scheme. The greatest advantage with this type of construction loan is that application and processing fees are reduced. Opting for a rate-lock agreement can prove to be advantageous for the buyer, especially if the interest rates are showing an upward trend. But it is also possible to get a better mortgage loan deal albeit at a higher rate for the construction loan.

Home construction loan Application

These are the details that are generally perused at the time of any loan application

  • If you are self-employed, the profit and loss statements along with tax returns and balance sheets for the past two years are required.

  • If you are employed, you need to provide your employer's address and phone number at the time of the loan application. Most lenders also require recent paychecks and information on bonus, commissions and average overtime.

  • A complete picture of your personal asset and liability information is a must. Personal information such as social security number of your and other co-borrowers, marital status, number and ages of dependents and current address and telephone number are mandatory for any loan application. Other sources of income such as rental property, disability payments and child support also need to be mentioned.

  • Details about the acquisition of the plot of land upon which the construction is to take place - this holds good for a construction loan application.

  • Complete documentation of the home building project - working drawings along with materials and construction cost breakup.

Tracking your credit score is critical to the loan approval process. Credit reporting agencies and credit bureaus provide credit reports to lenders so that they can take an informed decision about the credit-worthiness of the loan applicant.

Loan application interview

A loan officer will explain the different types of mortgage and other loan schemes that the lending company provides. He will assist you in filling out the loan application form and throw light on the interest rates and fees. Mortgage loan applications usually incur origination fees, interest rate on the loan and other miscellaneous charges.

During this loan application interview, you would do well to discuss all the terms of the loan such as the rate lock and pre-payment penalties. You can discuss the possibility of opting for a rate 'float' if you are confident of plummeting interest rates.

All problems relating to your personal indebtedness can also be discussed at the loan application interview. Outstanding payments and credit card dues as well as existing mortgages can affect your credit rating. Bankruptcy, illness and child support factors also play a part while perusing loan applications.

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