Construction Loans CA

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Real estate construction loan process steps

The following give details on the loan process, and how we can help you get the best rate on your construction loan.

Consultation to Discuss Options

Postponing a discussion about your options could be a costly mistake.

if you are planning on getting financing for your project.  For starters, spending money on the project before you obtain a loan could deplete the reserves that will be required to qualify for a loan.  Lenders typically require that you show proof of liquid assets sufficient to pay principal, interest, property taxes and hazard insurance for 6 months (reserves).  If you deplete your reserves by paying construction costs, than you may not be able to qualify for financing. 

Another risk of starting construction is the effect that it may have on title.  A title insurer may not be willing to issue a title policy because of the possibility that a mechanics lien may be recorded against the property for unpaid labor and materials.  If a title insurer will not issue a policy, then the lender will not approve your loan. 

Lenders may also decline your application for a construction loan because they are not able to inspect certain building components to determine whether they conform to your plans and specifications.  It is also possible that the contractor your hired for the project does not meet the  lenders' requirements to qualify your project for financing. 

To discuss your financing options, call us for a free consultation at 1-800-438-2704. 

Loan Application

Once you decide that you are serious about building a home, you will need to complete an application and obtain a credit report.  The application can be taken by phone and typically completed in 5 minutes or less.  After a complete application is received, your credit report and  scores will be obtained.  Based upon this information, we will advise you as to the maximum loan amount that you can borrow.  We will also give you a pre-qualifcation letter.  Now that you know how much you can borrow, you are ready to purchase a lot or if you already own one, hire a contractor.

Required Documentation

Certain documentation will be needed to process your loan.  In addition to providing documentation to support your income and assets, the following documents will be need for a construction loan:

1. Purchase contract for the lot if it will be, or was within the last 12 months, purchased
2. Copy of HUD-1 (closing statement) if lot was purchased within last 12 months
3. Plans and specifications
4. Copy of contract with architect
5. Copy of contract with contractor (must include fixed price and completion date)
6. Property Profile (statement of materials that is prepared by contractor)
7. Line item cost breakdown (prepared by contractor on lender's form)
8. Contractor's Statement (completed by contractor - provides information regarding license, experience, references)
9. Copy of contractor's license
10. Proof of insurance

Appraisal & Title Search

The loan process also requires a title search and an appraisal.  Title searches are necessary to confirm title and ensure that the property is lien-free.  After the search is performed, a title company will issue a title policy of insurance to protect the lender in the event that an undisclosed lien is later asserted against the property.  An appraisal also protects the lender.  It assures the lender that the loan amount is supported by the future value of the home.  The future value of the home will be determined by an appraiser that will review your plans, compile comparative sales data and prepare a written opinion as to the future value of the home. 

Closing

Once all of the requirements for the loan are met, there will be a closing.  At the closing, you will sign the loan documents along with construction disbursement instructions that identify the bank checking account that you opened to receive the construction funds that will be wired by the lender.  If you are refinancing a lot, then the balance owed on the lot will be paid-off after the closing documents are signed.  You will also be reimbursed for prepaid items that were included in your budget and not considered as part of your equity contribution . 

Draws

Shortly after the loan funds, lenders typically make an initial disbursement of 5% to get the project started.  After the initial disbursement, funds will be disbursed through draws that you request based upon the progress of the construction.  Draw requests usually require copies of paid receipts, lien waivers and an inspection of the project.  Although disbursement is done on a reimbursement basis, lenders will typically advance deposits of up to 50% of the total amount budgeted for line items such as rough framing materials, flooring, windows, doors, cabinets, counter tops and special order appliances.  Funding times differ among lenders but funds are usually received within 2 to 3 business days of a draw request.  Prior to disbursing funds, lenders perform title checks to ensure that no mechanics liens were recorded against the property since the last draw. 

No Monthly Payments

Most construction loans do not require out-of-pocket payments during construction.  An interest reserve is included in the loan and it is used to pay interest as it accrues during construction. Interest accrues only on disbursed funds.

Roll over to Permanent Mortgage

After the final draw request, your loan will convert to a permanent mortgage.  The requirements for conversion are:

1. Final Draw Request (at least 95% complete)
2. Certificate of Occupancy
3. Copy of the recorded Notice of Completion
4. Evidence of current homeowner insurance
5. Final lender inspection confirming at least 95% complete
6. Title search confirming property is lien-free

The interest rate and loan program for your permanent mortgage depend upon the lender that you select.  Some lenders offer float down options that allow you to take advantage of declining interest rates during construction.  Whether there is a charge to exercise the float down option depends upon the lender.  Call us for more information at 1-800-438-2704.