Building Your Dream Home
In my last blog, I discussed purchasing a residential lot and then holding it for a period of time before beginning to build your “Dream Home.” In this article I will discuss purchasing a lot with the intent of beginning construction immediately. This process has a lot of detail that intimidates many people, however, if you choose an experienced/reputable builder and banker, the process will be much more seamless.
The first step is to choose a builder. If you have not chosen a builder, then some extensive research needs to be done. You can get referrals from your banker, friends that have built or other people you know that have experience in home construction. In this case, it is always good to spend quality time having discussions with any prospective builder and researching whatever resources you have to assess the reputation and experience of the builder before you make your choice. However, if you already have a trusted relationship with a builder then this step is easy.
The next step is to decide if your builder is carrying the costs of the construction of your new home or if you will be expected to provide the construction financing. This will vary on what is typical in the construction market where you live. Either option is acceptable. When the builder carries the construction costs, you will not need to have any other type of financing other than a permanent mortgage once the house is complete. The permanent loan transaction will appear to be a transaction where you are buying the house from the builder. However, it is very prudent and most likely a builder requirement, to have a permanent mortgage pre-approval in place prior to executing a contract with a builder. It is also very prudent for you to analyze and educate yourself to the requirements of the Permanent Mortgage prior to starting this process.
The remaining discussion in this article describes the process assuming you will be providing the construction financing. It is imperative to start communications with your banker to discuss the Interim Construction Loan approval prior to signing a contract with the builder. The banker should help you through the process and timeframe of building the home. The banker will discuss the cash (equity) requirements, the level of cash during construction, obtain permanent mortgage financing options that are available once the construction is complete and make sure all things are in place for construction to begin. The banker, along with the builder, are your trusted agents to insure your “Dream Home” is a success.
At this time you have now signed a contract with the builder and the bank’s preliminary approval requirements are fulfilled. The next step is to develop and complete a set of design and construction plans. Some builders have multiple plan options you can choose from and/or modify to meet your objectives. Others may engage an architect to sit down to discuss all of the details you want in your “Dream Home.” Either one of these options is acceptable. If the builder has plan options that you like or can modify to meet your needs, this option is typically less time consuming. The other option of starting from scratch is often referred to as a Custom Design. This will probably make the time frame longer in the design and planning stage, but some people prefer to know that they have covered all the bases with the architect and have everything they desired discussed and negotiated in a Custom Design.
Once construction plans are completed, the next decision is to choose a residential lot. If you have not already purchased a lot, your builder may have an inventory of lots for you to choose from or he/she may help you negotiate for a lot in a neighborhood of your choice. If this option is not available, driving around neighborhoods and writing down seller information from the posted signage is an option. You can then take this information to a Builder or a Real Estate Agent to help you put in a Contract for Sale. If there is no signage, the Real Estate Agent or Builder can help you find out information about the availability of the lot. Once you are ready to sign a contract on the lot you will want to insure that the closing is simultaneous with the closing of the Interim Construction loan from the bank. (Again, your banker will help you with this.)
Once you have chosen the lot, you are really close to the start of building your “Dream Home.” At this point you have approval from the bank on the Interim Construction Loan, a signed contract with your builder for the construction and a pre-approval on the Permanent Mortgage once the home is completed. The bank will now take a set of the construction plans to a certified appraiser and engage the appraiser to provide a value of your “Dream Home,” assuming the home is already completed. If this appraisal meets the requirements of the bank’s approval and also as important, your expectations, then you will be ready to close the transaction at a Title Company.
At the Title Company you will be closing your Interim Construction Loan. The down payment requirements of the bank as well as any accrued closing costs associated with the purchase of the lot, the appraisal, architectural design, surveys, closing fees, etc. will be collected from you at this time. This loan is a line of credit which will advance up to its maximum face amount over the construction phase. It will be used to pay for the construction expenses to the builder during this time. Typically the first advance is to pay for the balance of the cost of the lot over and above your down payment requirement.
WHEW! As I mentioned, the process may seem difficult and confusing; it is not always the easiest journey to make your “Dreams Become a Reality.” However, please be patient and prudent to take the time to choose your builder and banker well. Good choices will result in a positive experience. Congratulations on making your “Dream Home a Reality.”