Construction Financing
Constructing a new home or refurbishing your existing property requires prudent financial choices. After all, how you manage your finances today can impact your financial health for years to come. Construction financing offers a temporary solution for real estate projects. Home or land owners can access these loans to cover initial costs, bridging the gap until permanent funding is secured. Many opt to transition their construction loan into a lasting mortgage at the project’s conclusion. Given their nature, construction loans often carry higher interest rates, reflecting their increased risk to lenders.
Typically, lenders seek at least a 25% down payment along with comprehensive blueprints, architectural designs, and a meticulous project plan.
A standard construction loan spans approximately 12 months, during which only interest payments are due. This setup benefits those building a new residence while still occupying their current one. The loan structure facilitates remaining in your present home as the new one is built, allowing a seamless transition upon its completion and potentially selling your previous property within the same timeframe.
Variables abound in this process, from selecting a builder to assessing property and construction values. Yet, with us by your side, you’re not alone. We recognize the thrill of home construction and offer versatile, competitively priced services. Reach out, and let us craft a financial solution tailored to make your housing dreams a reality.
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Which Costs are Covered?
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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.
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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.
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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.
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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.
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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’.
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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.
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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.
Which Costs are Covered?
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Land Accquisitions
At the project's outset, construction financing can facilitate the land purchase.
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Direct Costs
The loan addresses all expenses directly tied to the actual construction, encompassing both labor and materials. Both are pivotal to kickstart the project.
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Indirect Costs
These expenses, though not directly linked to the building process, emerge due to other aspects of the project. Examples encompass engineering, permitting, and architectural fees.
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Contingency Fund
Typically, an additional 10% is allocated atop the construction expenses as a safeguard. This reserve caters to unforeseen changes or necessary upgrades, offering both flexibility and peace of mind.
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Finishing Touches
Post-construction, you'll need items, like flooring, to make the space fully habitable.
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Overall Expenses
By aggregating all previously mentioned costs, you'll arrive at the project's complete financial requirement. Lenders will typically grant a loan based on the lower of these overall expenses or the property's appraised value.
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Land Equity
This represents the value gap between the land's appraised worth and its outstanding loan amount. Any discrepancy can be applied towards the initial down payment."
How Can I Apply?
Blueprint Collection
Kick off by procuring the detailed architectural designs for your initiative. Beyond a floor plan, these should encompass exterior views, precise measurements, and material specifications. For instance, clearly specify if the roof will feature lightweight tiles, shingles, or other materials. Submitting this to the appraiser allows them to determine a value based on the outlined criteria.
Contractor Collaboration
At this juncture, establish an agreement with a contractor for the entire undertaking. Leveraging the designs from 'Step 1', the contractor will furnish you with a price estimate and projected timeline. Once received, consolidate this with your original blueprints and project specifications.
Detailed Contract Development
The contractor then crafts an intricate contract, delineating costs by category. This 'draw schedule' should align with the previously given estimate, facilitating the upfront disbursement of funds to the contractor.
Lender's Assessment
Using a dedicated worksheet, the lender evaluates all projected expenses to ascertain the ceiling for the loan amount.
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