Category: Construction

What’s unique about a construction loan?
It’s a short-term (usually 12 to 18 months) loan used for the materials and labor needed to construct a home. Sometimes, the funds are also used to purchase the lot the house will be built upon. The interest rate for a construction loan is typically around 1% higher than mortgage rates, but they are variable. So, the rate may change throughout the loan term.

How much down payment do I need?
Many lenders (and almost all banks) require 20%. They do this because, unlike a home loan, there is no way for them to recoup their losses (sell your home) if your loan goes into default. If you own your building lot outright, you can use it as equity towards your home’s construction loan.

Mann Mortgage can offer construction loans for much lower – under 5% for almost all the loan types for borrowers who meet requirements.

How do I know how much money I will need to build a house?
Start your planning by talking to your home lender to see how much you could be approved for. Then, work with a builder to find a home they can build that fits the price you and your home lender discussed. Once you have a detailed building plan for your house, you’ll likely be asked to send it and your builder’s details to your home lender. Most lenders will review­­ your building plans and the land to make sure they appraise for more than your building cost before you are approved for your construction loan.

Can I do some construction work myself to save money on my build?
No, you can’t complete any work on your own as a DIY project. Doing so many lower your home’s appraised value, your work may not meet building standards, and your home may not pass final inspection to receive your certificate of occupancy. Even if you’re a construction professional, you cannot work on your own home’s construction.

What’s the difference between a one-time and two-time close?
A one-time close means you get approved to finance both construction and mortgage for your new home at the same time. After construction is complete, your loan automatically becomes a traditional mortgage. There is one loan and one closing.

A two-time close means you get two loans. The first loan will fund your construction. You will apply for the loan, get approved for it, and close on this loan. Then building begins. At some point as construction nears completion, you will apply for a refinance to turn your construction loan into a 15 or 30-year mortgage. When the refinance is approved, you will close on this loan, and you will now have a mortgage. There are two loans and two closings.

When does the loan interest rate lock?
Locking in your rate means your lender has agreed to give you a specific mortgage rate if the loan is closed within a set length of time. Most lenders lock the rate 30 to 60 days before closing. For a one-time close you would lock the rate for construction and later for the final mortgage. Your file may be reviewed for float down – meaning you would have the option to lock in a lower rate if it has dropped during the lock period. For a two-time close your rate will lock for each loan. Once for the construction loan (and it’s usually one percentage point higher than a mortgage) and once when it is refinanced into a 15- or 30-year mortgage.

How is my builder paid?
Lenders use what’s called a draw schedule. It’s a plan that details how you will send payments to your builder during construction. A builder gets paid as work is done, not in one lump sum. Your lender releases funds slowly as each project milestone is complete. As example, after the foundation is complete or after the framing is done. This minimizes your losses and your lenders losses in the case your builder is dishonest or if they go out of business during the months you’re building.

Working with a local home lender for your construction loan is a wise decision. Local lenders, like Mann Mortgage, know your community and have experience doing construction loans in your neighborhood. They’re also able to recommend a builder for you to work with.

There are a lot of decisions to make when you’re ready to build your new home. Setting your budget, finding a home plan, deciding on the area to build in, and much more.

You’ll also have to pick where you’d like to get your construction loan from. We can all name a few of the national mortgage companies – but what about the hometown lenders? What advantages can they offer against the giant loan companies?

Smaller down payment
Most large lenders and banks require a hefty down payment. And it makes a lot of sense when you consider there’s no physical collateral backing up the loan. It’s not like the bank can sell your house to recoup their losses if you aren’t able to make payments. That’s why a home construction loan is considered risker than a loan to purchase an existing house. Most banks need up to 20 – 30% down payment.

Smaller lenders have a lot more flexibility when it comes to down payments for construction loans.

Mann Mortgage’s construction programs have down payments that are far less than what big lenders offer. You can get a construction loan with 5% down for a conventional loan, 0% for VA loan, and 3.5% for USDA loan. This makes home construction a possibility for far more people.

Better relationship with local builders
Large lenders can give you the funds for your build, but can they recommend builders? Can they give you advice on what areas are the most coveted in the community? Have any of your local builders worked with them before? Probably not.

When you work with a smaller hometown lender, they have spent years (even decades) in your community. Some, like Mann Mortgage, will even recommend a builder for your project. Mann Mortgage’s branch locations have approved builders they’ve worked with in the past. For these builders, they already know how they’ll get payments, who to ask if they have questions, and they may already have a relationship with your lender – it’s a more comfortable and easy relationship for everyone involved.

Quick mortgage answers
Every lending institution offers customer service and a number to call if you have questions. But large lenders often don’t have a dedicated loan officer assigned to each customer. You can get assistance, but you’ll have to call a customer service line to talk to a random representative.

Small lenders, like Mann Mortgage, have one dedicated loan officer available for you through the entire loan process. You’ll have their direct line, office number, email, and sometimes even their mobile phone for text and calls. The benefit? Faster response times, less anxiety, quicker answers, and a better guarantee you’ll close on time.

When it comes to building, the general rule for keeping it affordable is to keep it as simple as possible. A simple crackerbox-style house on a flat lot in a subdivision with utilities is going to be much more affordable than a Victorian house in the woods built into a steep hill.

1. Work with your lender to find your budget

Before you even start looking at house plans, contact a trusted local home lender that offers construction loans to see what you qualify for and what your best option is. A good lender will take time to get to know you, your financial goals, and help you come up with a financial plan to build a new home you can afford for many years to come.

2. Find a simple home plan

Houses with a small square footage but complex design will cost more to build than you expect. When selecting a house plan, look at the footprint and roof. The structures with the most basic footprint (think of a house that’s just four exterior walls) and simple roofline (a roof that looks like an inverted V without any dormers) is the most economical to build. When it comes to the interior space, consider where plumbing is located. Plans with bathrooms, kitchens, and laundry rooms clustered together are more economical to build.

3. Build up, not down or out

Foundations and roofs are expensive. To keep your build more affordable, limit both. If you need more space, pick a simple two-story house with a small footprint over a single-story ranch.

4. Find a flat lot

Building on sloped land brings a lot more challenges than flat ground. If your building site is already sloped, your builder will have to level it out. They can cut into the ground to make it flat, they can bring in soil to fill in the plot and make it level, or they can build the home on supporting wood or steel columns. All of these options add additional costs you wouldn’t have if you built on a flat lot. You’ll also find that drainage and sewage will be more difficult and more costly when you’re building on a hill.

5. Find a lot with utilities

Bringing in utilities is expensive. In order to begin your construction project, your builder will need a power source. If, as example, you purchase a lot that doesn’t have electricity going to the build site, be sure to understand the cost of bringing it in. Most power companies will install service lines for free – so, perhaps from the road to a build site that’s 100 feet away. But if your build site is down a half mile driveway, you will likely have to pay for the wiring to bring electricity to your site. The cost can range between $25 to $50 per foot. For a half mile, that could be between $66,000 to $132,000. If your site doesn’t already have water, you’ll have to put in your own well.

6. Contact builders to get an estimate for the plan you want to build

If you have a basic house plan and an idea of where you’d like to build, most home builders will be willing to give you a rough estimate of the cost per square foot. As you call around, you’ll find that some builders specialize in luxury homes while others focus on homes that are more budget-friendly. Eventually, you’ll find one that fits your budget and home style. Be sure to find out how busy they are and when they’d be able to start the build. These are both important factors to consider – especially if you’ll be renting an apartment during the build.

7. Affordable finishes

At some point during your build, you’ll have to start making choices about what kind of finishes you’d like. Consider linoleum or carpet instead of wood flooring. Or laminate countertops in place of granite. Consider basic rods instead of closet cabinetry. These finishes can always be upgraded in a few years if you decide you really want them.