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Digging into Construction Loans By Erin Harvey
f you are like me, you have watched your building or renovating a house from start to fair share of HGTV shows giving you finish. That means the loan can often incorplenty of ideas for home construction porate the land purchase as well if you don’t and renovations. It looks easy enough, already own the land you’re building on. Loan right? How hard can it be to attain that proceeds can also be used for the cost associChip and Joanna style? One of the biggest ated with architect plans, and of course, the factors that comes into play is how you will labor and materials for construction. fund your project. If you are thinking about The loan is generally set up as a line of credobtaining a construction loan there are many it, meaning you won’t receive all the funds in aspects to consider including how the loan one lump sum like a typical home purchase. will work and what is required to qualify. Loan proceeds will be disbursed through a seJust as building a home is not a one size fits ries of “draws” or installments as you complete Erin Harvey is a CRCM all process, neither is the type of loan. The first the various stages of the project. This way the and assistant vice common loan type is a construction to permalender can inspect and evaluate the status to president at nent loan; this finances the construction of ensure it matches where funding should be. In Lamar Bank & Trust a home and once completed converts into a most cases, you will only make interest payCompany in Lamar, Mo. fixed-rate mortgage. Borrowers can sometimes ments on the funds you have drawn on, not She can be reached at save on closing costs and lock in permanent the full loan amount. Depending on the lendeharvey@lbt.com. financing with one single loan. Construcer, you also may have the option to convert tion-only loans are generally short term with your construction loan into a mortgage after an adjustable rate to complete construction of a home. Once construction is complete. If this is not an option, you can apcomplete, the loan is paid in full or refinanced into a permanent ply for a mortgage, often referred to as the end loan, to pay off mortgage loan. This requires two separate application processes your construction loan. and closings. This is often a good choice for homeowners waitThere’s a lot to consider when taking on a construction projing on the sale of their current home that will apply cash to their ect. For that reason, it can be tempting to settle for the first construction project prior to the end loan. Renovation loans lender you find. can cover the cost of purchasing a home plus additional renovation/remodeling. The loan amount is based on the anticipated Make sure you choose a lender that fits your unique value of the home after renovations are complete. Consumers needs by asking the following questions: looking at a fixer-upper project can utilize this type of loan for an “all in” project. 4 What types of construction loans are available? Since traditional mortgages are secured by a completed 4 What interest rates are available? house, construction loan approval is slightly different since Are they fixed or variable? you are starting from the ground up. During the approval pro- 4 What closing costs or other fees can be expected? cess, your lender will want to review the blueprints as well as 4 Can the equity in already owned land the estimated construction timeline and budget. The lender be applied toward a down payment? will want to make sure your architect and builder are qualified, 4 How are draws paid – licensed, and insured. Also, by providing the lender with as as a percentage of completion or much detail as possible ensures a smooth process, be sure to based on a set schedule? provide your lender with the purchase contract for the land or 4 Can the builder request a first draw legal description if the home site is already owned. to pay for materials? While different financial institutions may have varying 4 What happens if there is a delay in building guidelines, construction loans are generally short-term (12the home or a sudden increase in 18 months) financing used to cover the costs associated with construction costs?
MAY 30, 2022
Ozarks Farm & Neighbor • www.ozarksfn.com
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