How To Build House and Home

An Information and Instructional Guide

Chapter 9 – The Financing Process

We looked at affordability back in Chapter 3 (Financial Considerations), so by now you should know what size house you can afford. You have money set aside for the down payment and know what monthly mortgage payment you can comfortably handle. Now you need a mortgage loan. You will need a lender that does both construction lending and permanent mortgages. A One-Close mortgage can save you money. Where do you go to get the financing?

Funding Sources:

Your local Bank or Credit Union
Your local non-bank Mortgage Lender
National Mortgage Lenders
A local Mortgage Broker who can shop a number of lenders for you (for a fee)
An Internet Website

Normandy can provide construction loan financing, lot loans, One Close Mortgages and a full array of mortgage products

Once you choose a lender expect to fill out a number of different forms including an application. You should put together your personal financial documents including tax returns and bank statements. Should your situation make it necessary there are other types of loan programs that require less documentation. The loan rates and terms make not be quite as favorable, but the approval may be easer to obtain. They include:

Full Income Documentation - Normal full documentation & income/employment verification
Stated income – No income verification, just employment verification. Loan decision based on assets, equity and credit. (may also be called Limited Income or Low Doc or Light Doc)
No Doc – There is no required documentation of income or employment. Loan decision based on assets, equity and credit.

You can get financing for the lot and then later on for the construction. Generally some level of down payment or equity is required (5%-20%. In general the lower the Loan To Value (LTV) the better the Interest Rates. Interest Rates can be either fixed or variable. They can be “locked in” prior to the closing.

Normally the interest during the construction phase is on a variable rate.
Interest only payments may be required monthly or an Interest Reserve can be established.

In regards to the permanent mortgage, in general:

If rates are currently low and expected to rise in the future get a fixed rate.
If rates are now high and expected to drop go with a variable rate.

Terms generally run in 5-year increments.

The typical term is either 15 or 30 years.
Terms can go as long as 40.

Just remember that although a longer term means a lower payment is also means more money going towards interest rather than principal and the longer it will take to “Own” your own home.

What can you do to improve your chance of getting approved? Start preparing early:

Save up cash for a good down payment
Have extra cash available to cover cost overruns and provide general liquidity
Pull a credit report on yourself to correct any mistakes and make sure all debt is paid current. A better credit score can result in better interest rates.
Pay down credit card balances
Know all your income sources and have proof available
Show all your liquid assets on your personal financial statement
Have a co-borrower available
Get a financial gift from a relative

What should you expect at the closing table?

A lot of papers to sign
Words and phrases you may not have heard before and don’t know the meaning of (check the Glossary section for real estate and mortgage terminology)
Closing costs: some will have already been paid such as application fees, underwriting fees and the appraisal fee. Others such as: title insurance, recording & filing fees, attorney fees and state mortgage tax will be passed along to others. The lender keeps any points charged. If a broker is involved there fee will also be paid. Any real estate taxes currently due and house insurance premiums will need to be paid. If these items are going to escrowed a starting balance will calculated based the respective due dates.
You will provide a check for your down payment or provide proof of funds already put in.
A check for yourself? Maybe, maybe not. If you already own the lot you may be able to get a draw against it

What about the construction money?

The Lender will provide funds on a draw schedule based on construction progress made.
There will typically be four to five draws.
Funds will be disbursed after an inspection is made to verify that the work has been. completed. There will also be an inspection fee charged each time.
A portion of the funds (10%-15%) will be retained after completion to ensure all subcontractors are paid.

How will the Construction Loan become the Permanent Mortgage?

If you got a One-Close mortgage as mentioned above: