If needed, Winsome Homes has a number of financial institutions that we have worked with which have some great construction lending programs for construction in McMinnville, Yamhill County and beyond. We can help you to find the lending program that best fits your land, your building needs and your budget. In the meantime, here is an overview of the construction financing process to help you understand what is involved in financing the construction of your home.
There are two parts to home construction financing:
1) Use a home construction line to pay for subcontractors and materials;
and
2) Use a residential mortgage to payoff the construction line once the project is finished.
The basic process is as follows:
You will submit for lender approval an application for a home construction line of credit.
In order to obtain construction financing, you submit for lender approval an application for a home construction line of credit. This construction line will be used to pay subcontractors and suppliers during the construction phase of the project. These subcontractors and suppliers generally require payment within 30-60 days following work completion.
Once each month, or after each stage of the home construction:
Winsome will submit a request for funds to pay for subcontracting work and supplies that was used during the construction phase the previous month.
The lender will release funds after they have verified that the amount requested will be used for the construction phase that has been completed.
Typically, the lender will send out an inspector to verify that the work has been completed. If passed, funds will be released to line the next day.
Lenders normally require scheduled withdrawal amounts tied to each major phase of the construction.
If you request more draws than allowed per project, you may be charged a nominal fee per draw.
Don’t underestimate your need for up front cash. You will normally spend more money during the first construction phase than what you can withdrawal up front.
You should maintain a cash reserve account for cost overruns during a construction phase.
The construction line generally carries a higher interest rate than residential home mortgages.
You will need to apply for a residential mortgage to pay off the construction line when you finish the construction project.
In most cases, your approval for a residential mortgage will be required prior to obtaining the construction line.
The residential mortgage is like any other single-family home mortgage loans. These include conventional and non-conventional loans, fixed, adjustable rates, etc.
Some lenders offer both construction lines and residential mortgages as one loan.
The Construction/Perm loan is a combined loan made directly by the lender to the borrower. It functions as a construction line for financing home construction; then it serves as a permanent mortgage by paying off the construction line after you complete the construction project.
The Construction/Perm loan has several advantages, namely:
- the borrower can save money by paying for only one set of closing costs, attorney’s fees, appraisal and taxes
- since the construction line is contingent upon approval of residential mortgage, obtaining a construction/perm loan allows the borrower to submit and provide documentation for one loan application and work through one lending institution.
- because the loan is made directly to the homeowner, the borrower can take full tax advantage of the interest rate charges.
The Construction/Perm loan may also carry some disadvantages, namely:
- obtaining the best rate and terms. Some Construction/Perm loans carry higher than prevailing market rates.
- even though you may be working with one lender, usually the loan is managed by two separate departments. You may need to provide duplicate documentation.
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