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Building a new home from the ground up can be an exciting experience. It can also be a time of uncertainty and confusion. When you build a home on your own piece of land, you don’t take out a traditional mortgage right away. You apply for what is called a construction loan. Potential homeowners in the Golden State need to understand the process for applying and obtaining one of these loans. California construction loans have different rules and requirements than regular home mortgage loans. Finding a Lender The greatest obstacle you may face is finding a lender. Not all lenders loan money for construction costs. A lot can go wrong during the construction process, which is why not every lender is ready to dole out money. Once you’ve decided that you want to build rather than buy a pre-existing loan, you’ll need to find a lender willing to work with your situation. Why are lenders so wary of giving money for new construction? For starters, the collateral isn’t there. When a lender agrees to lend you money to buy an existing house, they know that if you renege on your promise to pay they can initiate foreclosure procedures. When a person takes out a construction loan, there isn’t anything initially to hold as collateral. This can create problems not only for the lender, but the person seeking a loan. Lenders may require the borrower to put down as much as 50% of the loan as a down payment or put other property up as collateral. Also, if you have a low credit score, the chances of being approved for a new construction loan are significantly lower. Sub-prime lenders do not typically lend for land or new construction purchases. How New Construction Loans Work Although it may seem daunting, don’t let the lending process scare you away from building the home of your dreams. If you have good credit and are in a good financial state, you can find a lender willing to help you make your dream a reality. If you have never had a construction loan, something that may come as a shock is the payment schedule. Unlike with a traditional mortgage, you don’t pay a principle and interest when building your home. In most cases, you’re only going to pay the interest while construction is taking place. And, your payments will gradually increase as construction moves forward. Confused? It can be confusing, but let’s examine the construction loan a bit closer. Construction loans usually have an expiration date of 1 year. The borrower is approved for a specific amount based on bids they received for the project. Once the borrower is approved for the loan and construction begins, the money is set aside in an escrow account by the lender and the borrower can draw from the funds a little at a time to pay for the costs of construction. When funds are requested by the borrower to pay for a particular stage of construction, most lenders will have someone physically check on the progress of construction. Because you are not using all the money at once, you are not expected to pay the principle since this amount could be less at the completion of the project. If the cost is more, you may have to renegotiate the terms of the initial approval. Principle and interest payments begin usually 30 days after construction is complete. Do you have more questions about California construction loans? If so, speak directly with a lender that specializes in construction loans to make sure you understand requirements and the process for building a home from start to finish.
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