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Francis Vayalumkal
Finance | Financial advice

By Francis Vayalumkal

Have you dreamt of building and living in the home you�ve helped design? If so, it�s time to seriously consider putting your dream into action.

A specially designed loan for just such a homeowner, the construction-to-perm loan, includes the construction loan to build the house, and the permanent loan to purchase the home. Mortgage lenders used to offer this as a two-part process, first financing the construction loan and building the house, then obtaining another mortgage to purchase the home. There were two closings, and two sets of closing costs with this type of loan.

The construction-to-permanent loan allows for one application process, one closing, and one set of closing costs and is simpler, cost-effective and less stressful for the applicant. Some construction-to-perm loans allow custom building of a home with an adjustable low payment during the construction process.

Lots for building custom homes

It is often best to select a finished lot. This means the lot is equipped with water and sewage systems, electricity and road access. The lot also should be recognized as a single piece of land and have a boundary designation recorded with the county or city.

Financing your custom-built home

Choose a lender who is experienced in this type of loan. Not all lenders would have a good construction lending department or competitive products. This type of loans require more administration that a usual loan and it is important that the lender is going to be able to work efficiently with the builder to make sure your home is built on time. The lender will want to investigate if the land is appropriate for building by reviewing the land survey and building plans first. They also will check to see if the builder/contractor is on the approved list of builders. If not, the selected builder will have to submit an application.

Select the builder of choice for your custom-built home

Many of the larger name builders are already approved for many lenders. Ask the lender if your builder is approved. If not, most private builders and architects can easily apply through lenders. Each lender has different criteria for builders. If the homeowner is not satisfied with the builder they have selected, many loan programs allow them to fire the builder and begin with another approved builder. This gives the home buyer power over their own destiny during the custom building and construction process.

Consumer highlights for construction-to-perm loans

Construction-to-perm mortgages are easily available for primary and secondary homes. They are also available for other occupancy types depending on the lender. The construction term of the loan is from six months to 12 months, with exceptions up to 18 months on some products. Ask your mortgage loan officer about subordinate financing. There are creative financing options available for buyers who want to put the minimum down and pay a low interest only payment while the house is being custom built.

Lender requirements for construction-to-perm financing

Lenders require standard credit documentation and high credit scores for construction to perm financing. Lenders also request: 1. Final plans and specifications (needed to obtain appraisal) 2. Purchase contract for lot (or settlement statement if already purchased) 3. Property profile (a description of materials for custom building). 4. Line item cost breakdown from the builder 5. The builder�s construction contract 6. A copy of the builder�s license 7. The builder�s statement or application (showing the company as approved or applying to be approved to build a home). In addition to these documents, it is essential that the homeowner obtain the necessary permits to build in the community. The documentation required will vary depending on the lender.

Benefits of construction-to-perm financing

Construction-to-perm loans are a single-close loan, and the consumer obtains financing before construction. This gives the homeowner cash to pay the builder and complete the construction. Construction-to-perm is a fully amortized loan. Nothing changes in the term � it is one mortgage. One of the greatest advantages to the buyer with this type of home financing is some lenders allow interest only payments while the home is under construction. This gives the buyer a low payment option in the beginning while living somewhere else. Once the home is occupied, the mortgage payments are changed to principal and interest payments.

Financial suitability for custom built homes

High credit scores are important to lenders for construction to perm mortgages. Liquid assets also are carefully scrutinized. For buyers interested in construction to perm financing, the lender will look for adequate savings to pay for the mortgage during the construction period of the loan. Loans with low or no documentation are available as construction-to-perm loans.

Down payment

Amount of down payment required will vary depending on the program. If you paid for the lot already, that could be considered as the down payment. Talk to your loan officer for details about that. I believe the construction to perm loans are a win-win situation. You are purchasing a loan that you feel comfortable with. You have a reasonable payment during construction, and business with the lender is concluded at the time the loan is made. With financing in place, you can make sure the final product is exactly what you want it to be.

Francis Vayalumkal is a loan officer at Market Street Mortgage and can be reached at (813) 971-7555 or via e-mail at [email protected]

Francis Vayalumkal is a loan officer at Market Street Mortgage and can be reached at (813) 971-7555 or via e-mail at [email protected]

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