Construction Loans

What You need to know:

One-Time Close Construction Loan

• ​Loan Structure: Single loan for both construction and mortgage
• LTV (Loan-to-Value): Up to 95% (PMI required over 80%)
• Minimum FICO Score: 700
• Debt-to-Income Ratio (DTI): Up to 50%
• Builder Approval: Must be approved by underwriters
• Contingency Fund: 5%-10% of construction cost
• Inspections: Similar process
• Interest Payments: Interest-only during construction
• Final Appraisal: Conducted at project completion

Two-Step Construction Loan:

The first step in obtaining a Construction loan is to get approved for the Conventional Conforming Mortgage. This loan will pay off the construction loan once the house is finished. Once the Conventional Conforming Mortgage has been approved, we will prepare a loan package for your bank so they can start on the approval for the construction loan.

The second step is obtaining the construction loan through your local bank. Construction loans are short-term loans that allow you to build your home. Sometimes they can be converted to conventional conforming mortgage loans when the house is finished (if you are using the ‘One-time Close’ program). Construction loans typically have tougher qualifying criteria and higher interest rates than conventional conforming mortgages for existing homes.

The construction loan can cover these costs:

• The land/lot
• Contractor labor
• Building materials
• Permits

The construction loan will not cover the design costs.  The architect will need to be paid separately by you.

The initial term on a construction loan generally lasts a year or less, during which time you must finish the project.  The general contractor will provide the lender with a construction timeline, detailed plans and a realistic budget (construction contract).  Funds are released at ‘stages of completion’.  Normally the funds are released in the form of a check paid to both you (the borrower) and the contractor.  Both parties are required to endorse the check before it can be deposited by the contractor.

Each draw will require an inspection by the lender to confirm that the work described on the contractor’s invoice has been completed.  You can expect 4-6 inspections, depending on the size of the project.

During the construction phase, you will be required to make interest-only payments on the Construction loan.  These interest-only payments will be based on the amount of money that you have received from the loan.  As the balance of the loan goes up, the monthly payments will increase accordingly.

Characteristics of the Construction Loan handled by your bank:

• Minimum FICO 700 – the higher the FICO the better the interest rate
• LTV 80% maximum – could be lower – depends on the bank
• Maximum Debt-to-income including the new mortgage 45%
• Origination fee will be charged by your bank
• Interest payments monthly on the outstanding balance of the loan
• Maximum 11-month construction period and the 12th month will be used for the final appraisal, reverifying credit and income in preparation for the final closing.
• 4-6 inspections during the construction phase.  There will be a charge for each inspection.

One-Time Close New Construction Loans:

Loan steps are similar to those described above, except your bank will not be involved. 

• Maximum LTV 95% – any loan amount over 80% will require PMI
• Minimum FICO 700
• DTI 45-50%
• Project and builder must be approved by our underwriters (Granite)
• 5%-10% of the construction cost will be held back for the contingency fund.
• Credit documents must be updated during the last 30 days of the project completion