Optimally, the process of obtaining financing for the construction project should be performed in conjunction with the Bidding Process.
Since both processes can take the same amount of time - a month or longer - it'd be a great time saver to have the endpoints of both processes converge at around the same time. However, you should take the time to find the lender with the ideal loan structure for your budget and timeline
Financing the Construction Project
Once you have an acceptable bid from the builder in your hands, it is best to have had made a decision on a mortgage lender. If you are at this point but still need guidance on how to seek out new construction financing, we suggest reading our comprehensive resource, The Basics of a Construction Loan, which explains the different types of loans and documents needed to begin the application process.
Financing a home construction project isn't always cut and dry: the lender is taking a risk that you have made wise decisions in selecting suitable land, hiring a qualified contractor, and have performed your own due diligence on what all is involved in the impending construction process. This explains why most lenders require an exhaustive amount of documentation and details regarding the construction project.
A list of the most common documents needed to apply for a construction loan can be found in the article referenced above.
Important points to keep in mind about financing the construction of a new home:
- Construction loans are available at both banks and credit unions
- In order to obtain a loan, you may have to provide an exhaustive amount of documentation, as outlined in our article, "The Basics About Construction Loans"
- A construction loan usually covers most expenses related to building a new home, such blueprint designs, land, permits and fees, even contingency reserves
- You are typically only paying interest on the construction loan during the process
- Most financial institutions have a standard LTV (Loan To Value) for financing construction and land. The LTV typically ranges from 80% to over 90%
- There are standard restrictions on how much time you have to complete the project, but the length can usually be extended
- You won't get all the money at once: the funds will be paid out according to a draw schedule and are subject to inspections by the financial institution
- Once construction is complete, there are a variety of permanent financing options for your new home
Signing the Contract with the Builder
At some point during the last stages of the Financing process, the lender will ask for both the completed plans and a signed contract with your builder. This information will be sent to an appraiser as part of the final steps of the finance approval process. This is the point where you must make any final adjustments to the contractor’s quote.
In the case with Carroll Construction’s clients, we provide them with a boilerplate contract for review via email and set a date to meet to sign the contract
Article by Robert Carroll
Robert is a NAHB Certified Graduate Builder with Carroll Construction. Robert joined the team in 2007 after graduating from L.S.U. with a degree in Construction Management. Now as Chief Operating Officer, Robert Carroll is extremely active in the local builder community, a leader in the LHBA, and is an avid supporter of charity and community causes inside the Greater Baton Rouge area.
