An initial component of constructing a custom home is securing the funding to cover the costs associated with purchasing the lot on which the home will be built and the building of the structure.
For those who don’t already own land or have the money set aside, obtaining a lot loan is often the initial step in the funding process. Prices and interest rates on the loan will vary based on the location, size, and land value. Balsitis Contracting can assist its customers in selecting a financial institution(s) to provide the needed loans.
Available from various financial institutions, lot loans typically range from two to twenty years and can have floating or fixed rates. It is necessary to complete the purchase of the lot to obtain approval to start construction.
A lender will require a variety of information to authorize a loan, including your historical and present financial situation. It is likely that a larger cash down payment will be necessary to purchase the lot.
When the lot is secured, the next step for most is obtaining a construction loan, which is typically shorter in duration, most often 12-24 months, dependent on the project scope. To secure a loan of this nature, a down payment of 20%-30% of the total loan cost is usually needed.
The most common construction loan is the one-step or single-close loan, which will automatically switch to a traditional mortgage when construction is finished. This type of loan allows you to complete only one loan application process.
A significant part of the loan process is providing financial information and completing a variety of paperwork, which includes…
- Proof of identity
- Recent pay stubs
- Proof of other income
- Current bank statements
- Recent tax returns
- Recent statements for other assets
- A list of debts with minimum monthly payments
- Down payment source
- Other liabilities
- Your current rent or mortgage payment
- If you are self-employed, the institution will want to see your profit-loss statements
The lender will also need to approve the home builder, showing that the entity has a history of completed construction projects. Regardless, the individual is responsible for the construction loan.
Upon securing the loan, construction can start, with funds expended as needed. This allows for the individual to pay interest only on the loan as funds are disbursed rather than the full amount obtained. These distributions are called “draws” and the lending institution will have an inspector confirm work has been completed to a certain point before the draw is sanctioned. As part of this process, it is suggested that lien waivers be obtained showing that suppliers and subcontractors have been paid for their materials and/or supplies by the builder.
The individual typically makes interest-only payments during construction and only the interest charged on each builder draw. During this time, monthly payments start low and increase as construction progresses. When the loan converts to a mortgage, payments change to principal and interest.
Having financing in place before starting construction of a custom home offers security that everything needed is covered financially. Partnering with an established builder like Balsitis Contracting may also result in the financial institution providing lower interest rates.
For assistance in securing financing for your new home, addition, or large-scale renovation project, call Balsitis Contracting at 262-203-3952, e-mail info@balsitiscontracting.com, or complete our online form.