When looking to build a new home or renovate your current property good decisions need to be made when it comes to money. Ultimately, financing is one of the biggest decisions you will make because, if done incorrectly, you could be left in debt for many years to come. Construction financing is a short-term arrangement made to finance any real estate-related projects. To get started, the home or land owner will take out the loan to cover all the related costs of the project and this helps to get started before a more permanent source of funding becomes available. At the end of the project many people chose to refinance construction loan into permanent mortgage. For the lending company, construction loans have more risk than regular loans so the interest rates are generally much higher.
At the very least, a 20% down payment is normally required from most lenders on the loan along with blueprints, architectural drawings and detailed project plan.
As you can imagine, there are several variables within this process such as the builder you choose, the value of the property, the value of the work being done, and more. However, we can help you with whatever you may need. We realize that building your home is an exciting time so we offer a flexible service at an affordable price. Once you contact us, we will work towards a tailor-made financial solution to help make your dream come true!
Which Costs Are Covered?
Land Value
At the start of the project, you might want to cover the purchase of the land and this can be done with construction financing.
Hard Costs
The loan will cover any costs that are directly related to the building work being done so this means labour as well as the raw materials. Without either of these two factors, the construction cannot start so these are both essential to your project.
Soft Costs
These are the costs that are indirectly related to the project which means that they arise as a result of something else. For example, this could include engineering fees, permit fees, and architectural fees. If the cost doesn’t directly relate to the contract but it does enhance the project somewhat, it falls into this category.
Contingency Reserve
Generally, you will find that an extra 10% will be added on top of the construction costs as a contingency account. At times, orders will need to be changed or upgrades are required so this contingency amount is highly recommended. If you find that it doesn’t get used by the end of the project, at least you had it there for security and peace of mind.
Allowances
After the actual construction, you will probably need items in the home or extra room such as flooring and other products to make it ‘livable’.
Total Costs
Taking all of the previous categories we have discussed in mind, you will come up with a total cost for the entire project. When the company is deciding how much you can borrow, they will take the lesser of the total costs or the appraised value.
Lot Equity
Lot equity may also be found and this is the difference in value between the loan to be paid off for the land and the appraised land value itself. Any difference will be credited towards the down payment.
How Do I Apply?
Step 1
At the very start, you will need to obtain the architectural drawings for your project. In addition to a floor plan, it must have the exterior, dimensions, descriptions of the materials, and more. For example, the roofing may consist of lightweight tiles, shingles, or many other materials so this must be clarified. Once this has been given to the appraiser, they can decide a value subject to the specifications.
Step 2
Here, an agreement will be made with a contractor for the complete project. Using the plans from ‘step 1’, the builder should provide you with a quote as well as timings. After you have obtained this, it should be kept together with the initial plans and specifications for the project.
Step 3
From here, the builder should go off and create a detailed contract with all the costs broken down into sections. Often called the ‘draw schedule’, this should match up with the quote in the last step and this helps the money to reach the builder before the project begins.
Step 4
The lender will use a worksheet to assess all the costs in order to decide at the maximum loan amount.
