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So You Want To Build Your Dream Home... What's Next?

Posted in Main Blog
July 24, 2014 by BCCU Share on: Share on Facebook Share on Twitter

Construction loans are easier than you think!

Many new home developers recognize that more and more home buyers want custom layouts and features in the houses they're building. When you work with a housing developer that is developing a parcel of land and building a number of homes on it, there are limits to how far you can customize your home (and sometimes specific requirements you have to adhere to.)

But we know there's a group of intrepid individualists—you!—who want to design and plan every aspect of your very own dream home. When you hire a contractor to build a specific custom home for you, the options are endless. As a financial institution that can dream as big as you, Bellwether can help you learn the steps of working with a contractor to build your own home. We want to ensure this exciting adventure is as smooth as possible.
Steps to building your dream home

  • Select a contractor - There are three ways to find a great contractor. One is from friends or family members who have worked with one. Another is your real estate agent who may be helping you find the perfect lot. The last one is from your Bellwether Mortgage representative who will help you with your construction loan.
  • Review and select a home plan - Do some research online about the kind of home you like—with or without a basement, the number of bedrooms you need—and show samples to your contractor. Your contractor can steer you in the right direction for home plans and blueprints.
  • Determine your budget - Different things, such as the pitch of your roof, the number of bathrooms, the kind of molding you want, all affect the overall cost of your custom home. Your contractor can give you a very rough idea of what to expect, but only when you nail down the specifics can he send out requests for proposal and get some definite costs for you.
  • Secure financing - A custom home you build with a contractor will likely require a construction loan. At Bellwether we work side by side with you to plan and secure your financing so every phase of your build is hassle-free. See below to learn how a construction loan differs from the more common residential home loan.
  • Begin construction - Your contractor will hire and manage all of the trades needed to build your home, from excavating and pouring foundation to the final finishes such as installing light fixtures and sodding your lawn.
  • Consult regularly with your contractor - Make sure you're on the same page with regard to when decisions need to be made on things like paint color, finishings, fixtures, tile and other materials. If decisions are made in a timely manner (in advance whenever possible) then the building schedule will stay on track, which is a requirement of your financing.

Construction loan vs. standard home loan

The primary difference between a construction loan and a standard residential mortgage loan is that with a construction loan we are advancing money on a house that doesn't exist yet. We have to obtain an estimate of the value of the finished home, and then weigh risks due to changes in plans and schedule, which could impact the costs and the final value. To mitigate this risk, we normally review construction loans much more carefully and schedule periodic inspections of the project.

A standard residential loan pays all the funds up front, with a monthly payment set up for the buyer (you) to repay the loan over a long-term schedule. Construction loans, on the other hand, are somewhat different.

New construction loans can be described as "a reimbursement process.*" Land is selected, plans are drafted, and the loan is reviewed and approved by the lender. The construction project is scheduled and as work is completed, the homeowner submits a "draw request" along with documentation to prove completion. The lender has a third party inspect the work and then issues a reimbursement payment for the completed construction for that time period. The buyer typically makes interest-only payments during the construction phase, and once the home is completed the builder will either convert the construction loan to a traditional mortgage or the owners will need to refinance.

Tips to getting a construction loan approved

Here are some tips to make the critical step of your construction loan application with Bellwether as strong as possible.

  1. Get a thorough understanding—and all the forms required—of your financial institution's requirements for a construction loan.
  2. Consult with local realtors as well as the city to get an accurate assessment of the value of your property, and homes similar to what you want to build.
  3. Investigate and find a builder or contractor you're comfortable with. Make sure you like his or her work, and that he or she is reputable. Your financial institution may even be able to recommend some.
  4. Obtain blueprints of the home you want to build, and work with your builder or contractor to create an accurate estimate of costs and schedule of completion.
  5. Work closely with your financial institution as you prepare your documentation. The closer you work with them, the better they will get to know you and understand your project. This could add efficiencies to the decision process.

Getting a new construction loan can be confusing, but Bellwether can help. Do your homework on market value, construction costs, and what your income will allow, then give us a call.



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