Congratulations! You found the perfect house plan at house-plan.org and now you’re ready to build your dream home. This is the start of an exciting journey. Whether you’ve purchased land or not, now would be a good time to look into financing. 

How are you going to pay for the construction of your dream home? 

Most likely you’re going to need a new home construction loan. There are special loans just for the purposes of financing construction. Residential construction loans are short-term mortgages taken to finance the construction of a home before getting permanent or long-term financing. It allows you access to your money as payments are due during the construction of your home. 

The lender pays you, or your builder, depending on how you have it set up, as the various stages of construction are completed. 

What kind of construction loan is right for you? 

That depends on your financial situation, your construction timeline and your reason for building. The best idea is to be well educated on all your options. Rushing into things just to get the ball rolling could prove to be costly. Weighing your options and finding the right kind of loan for you could help save you money. 

Let’s look at the three most common types of construction loans: Construction-to-Permanent, Lot/Land and Bridge.

Construction-to-Permanent

A Construction-to-Permanent Loan is a loan with a single closing. It is designed for those that are building, or renovating, a primary or secondary residence who then want to obtain permanent financing without taking out a second loan. It covers the interim construction phase and the permanent loan phase. 

By getting a Construction-to-Permanent Loan you could save thousands of dollars on closing costs by only closing on one loan. 

Lot/Land

The Lot/Land Loan is a great way to finance the purchase of a piece of property that you will build a home on in the future. This type of loan has a balloon maturity option which allows you a few years to design your home and find a builder. You can save money by financing the cost of the land without having to have a large down payment. 

Once you are ready to build, you will need to get financing for the construction. This would mean that you will be paying closing costs on two loans, but you have hopefully built up equity in the land you purchased.

Bridge

Finally, we come to the third type of residential construction loan; the Bridge Loan. A Bridge loan is designed for homeowners planning to construct a new owner-occupied primary residence. 

You have to potential to save thousands of dollars by using the equity in your current residence as the down payment on the loan instead of having to come up with a hefty down payment. For more information on bridge loans, and all types of construction loans, visit IndyMac Bank online.


BE PREPARED! In order to qualify for financing you will need certain documents in addition to your general credit applications. 

These requirements differ from state to state, but be prepared to show your lender:

• building plans, 

• fixed price builder contract, 

• detailed line item cost breakdown,

• description of materials, 

• completed construction loan budget worksheet, 

• builder statement 

• and a copy of your General Contractor’s License

• building permit

• proof of insurance


Having these documents in hand and ready to go when you meet with your lender will save you time in document processing and could end up saving you money; by having your paperwork ready to go you can get a lock on a good interest rate.


SAVE MONEY BY TAKING OUT MORE MONEY: It may sound strange, but cost overruns on your construction could potentially cost you thousands of dollars in closing costs, points and fees if you have to get a second loan. 

If you run out of loan money before construction is finished you will have to get more financing. It may be better to try to get approval for 10 to 15% more than your budget calls for up front. That way you give yourself a financial cushion to fall back on in case of unexpected delays or problems that increase the price of your construction. 

Usually the loan amount is based on the price given in your building contract. You may want to have higher allowances, or an allowance for cost overruns, so that you'll have a little extra money, just in case. Ask your lender how cost overruns will be handled if the cost to build exceeds the initial building contract. 

If you greatly exceed the amount you are approved to borrow then there's no guarantee the lender will let you borrow additional money. You may be forced to foreclose on the loan and sell the home. If your costs exceed the construction loan you may need to come up with money yourself to get the project finished. 

Therefore it is best to get approval for what you may need and not exceed the amount you were approved to borrow. 

Also you will need to pay monthly interest charges on the loan while your home is being built -- remember to include that interest in your budget. House-plan.org  offers a Cost-to-Build™ service that can be very helpful in building your budget. It’s better to over estimate and under spend rather than yourself out of money with a stack of bills to pay.

No matter what type of loan you ultimately choose, make sure you make an informed decision. Talk to your contractor, mortgage broker, real estate agent, financial planner and lending institution. Get as much information as possible so you get the loan that’s right for you and save money while doing it.