Building A Home: The Loan
To this point, we have a vacant lot under contract and construction plans in the works. We needed financing to get the ball rolling. With an existing home, there is a structure with value to hold as collateral for a loan. That’s not the case with a new build. For new construction, a lender will put together a construction loan or a construction-to-permanent loan.
In broad terms, a construction loan is any loan that is used to finance construction of some kind. Before a lender will provide a dime for construction, they’ll want to know that their money is safe. The first step for the lender is to have an appraisal of the proposed home done. Using the home plan designs and the contract for the vacant lot, an appraiser will provide the loan underwriters with the value they think the fully erected home would be worth. If the appraised value exceeds the building cost (builders estimate + land cost), the home will continue through underwriting.
Construction loan proceeds are paid in “draws”. After completion of predefined phases of construction, the bank will pay the builder for the work completed in that phase. This insures that work is actually being done to get the home to completion.