It's a great time of year to look at building a home. Tim Sanderson, mortgage lender at Peoples State Bank – Minocqua, offers this advice on the construction loan process.
1. Get Pre-Approved First
“It’s always a good idea to be pre-approved for a construction loan before you select a builder and finalize plans,” said Sanderson. “Then you can build your dream home within the budget you can afford and won’t have to make changes further down the project due to financing challenges.”
2. Get Your Finances in Order
Your ability to get a loan is affected by many things, including your credit, down payment and ability to repay. “Make sure to look at your credit report ahead of time and clear up any bad debt or credit issues before securing a loan to get the most favorable pricing,” said Sanderson. Saving up for a down payment or having equity in the land is a good move as well.
3. Work with a Local Lender
Choose a lender near the area you want to build. “A local lender is going to be experienced with the builders, title companies and appraisers in the area. They understand the market and players and will make the loan process as efficient as possible,” Sanderson noted.
Financing home construction is a two-step process. The first being the construction loan, and the second securing the final mortgage.
“A construction loan is basically a line of credit,” said Sanderson. “The limit on the construction loan is based on the cost of construction and a percentage of the appraised value, which is a forecast of the value of the home when it is completed.”
As construction starts and the builder requests funds for work and materials, the buyer makes draws on the construction line to pay the builder. During this temporary period, the buyer also makes interest only payments to the bank.
Once construction is complete, the bank will finalize the total amount borrowed and convert that into a final mortgage. “Peoples offers a variety of terms and mortgage products to meet our customers’ needs,” said Sanderson.
For more information or to get started with a pre-approval, contact Peoples State Bank at 888.929.9902.