Construction Loans

Thinking of building a new home? There are many factors to consider in financing a new home build. The most important is cash flow - what size loan will your income and down payment support? The second most important is maintaining the proper loan to value ratio, so your project can go forward without delay - when will your builder require monies and will you use bank money or personal money to cover the cost? The third factor to consider is whether to sell your home prior to initiating a build or living in your current home until your build is done - Waiting to sell your home could leave you with 2 mortgage payments when your new home is done, but the downside of selling immediately is having to rent while the new home is being built.

In a construction mortgage, the bank will have your house plan appraised and will come up with a estimated completed value. This value will be used to decide how much money the bank will lend you. 75% loan to value is a common maximum loan amount for a construction mortgage. For example, if a house plan and land are appraised at $400,000, the bank would make up to $300,000 or 75% loan to value available.

Money is provided to you based on an appraiser's evaluation of work yet to be completed. In every construction mortgage, the bank will forward you money based on the cost of work yet to be completed, not on the actual cost of work done to date!!! So keep a financial reserve to pay for any shortfalls in the draw amounts! This has been a bone of contention with many a construction mortgage; be aware, don't let it happen to you.

The low cost of a short term interest only loan, can keep your monthly bills at a minimum while you build, but time is of the essence. The longer it takes to build your home, the longer you will pay interest on any funds borrowed. Further, as your house nears completion, the amount you owe will grow as you pay your builder for work completed.

Once your home is completed, your mortgage consultant will again seek out the best mortgage product for you, and use your new mortgage to payout the construction loan and other outstanding bills related to the build.