Common Questions About New Home Construction Loans (Part 2)
If you’re building your own home, you probably have a lot of questions. We explored a lot of our most commonly asked home construction questions in Part 1. Guess what — you had a lot more questions, so we have lots more answers!
There is so much to consider before beginning your home construction project. There’s the fun stuff like finding the right plot of land to build your home on, designing the perfect floorplan for you and your family, and choosing all the design elements that make your home uniquely you.
Then there are the less fun things like figuring out loan costs, lot financing and insurance policies. While you might consider these aspects of your project boring, these details are incredibly important, and once you can sort it all out you can focus more on the fun stuff. Plus, the friendly loan officers at Great Midwest Bank are always here to help make the process much less stressful.
Ready for Part 2? Let’s dive into answering more of the most frequently asked questions on New Home Construction Loans.
[Check out Part 1 of our Common Questions About New Home Construction Loans series.]
Is an appraisal needed for new Home Construction Loan? How does that work?
Yes, an appraisal will be required for a New Home Construction Loan. The home isn’t built yet, of course — so a lot of people wonder how the appraisal can take place and how the financing amount for the home is determined.
In order to appraise a home construction, the appraiser will consider the construction contract, plans and specifications. Then they will conduct a search that includes a number of comparable sales within the area during the last six to twelve months. Under most circumstances, the financing amount is the lower of total costs or the appraisal amount.
How does the draw process work?
Instead of covering the full lump-sum cost of your home at closing as you would for a traditional mortgage loan, Home Construction Loans are paid out in installments, or “draws.”
The builder’s schedule usually accounts for 4-6 construction draws that correspond to different phases of the home building process. The dollar amount of each draw will vary depending on the work being done.
You will approve each draw after a title company has verified the work performed. The request is forwarded to the bank which in turn provides funds to the title company. The bank then disburses those funds to the builder, who is responsible for paying each subcontractor and material provider.
What can I expect for payments during the initial construction period? What about after construction is finished?
During construction, you will pay interest-only payments on the loan. As the borrower, you will also need to approve the payment draws outlined above.
At Great Midwest Bank, you can set up a construction-to-permanent New Home Construction Loan with a one-time close. Once the new construction is complete the cost is converted into a Home Mortgage Loan at closing. This means you only submit your financial documents once, and only close once. This can save you a lot of time and extra expenses.
Another option is a construction-only loan. For these loans, once construction is complete you must fully pay off the loan balance. If you require a mortgage to help pay off the initial New Home Construction Loan you will need to be re-approved for the new loan and pay another set of closing fees.
Talk to one of our friendly and experienced loan officers to get started on a New Home Construction Loan.
Why is a title company involved in the construction process?
A title company is used to administer the construction draws as a neutral party to both the builder and the lender. The title company inspects the project each time a draw is requested. The point of this step is to ensure that all work necessary is being completed and contractors are paid as planned. These inspections also help verify that the project is still progressing according to plan.
How does lot financing work when building a home?
Great Midwest Bank offers lot financing. However, to save time and avoid paying two sets of closing costs we recommend closing on the lot purchase and New Home Construction Loan at the same time.
I have already purchased and financed a lot. Will that payment continue?
Another common circumstance we encounter is that a customer has previously purchased and financed a lot to build on. In this situation, people may be unsure how this fits into the home build costs and if the existing lot payments will continue after the construction is completed. In this case, the remaining mortgage balance on your lot will be refinanced into your new construction loan so you will have one payment during and after construction.
What kind of homeowner’s insurance is necessary?
We require homeowner’s insurance coverage equal to at least the amount of your loan. In addition, a “builder’s risk endorsement” at a small additional cost is required for all construction loans.
Builder’s risk endorsement, or builder’s risk insurance, provides coverage for the home while it is under construction. This includes circumstances like loss or damage to the in-progress build (including building materials and equipment).
How quickly can I be approved for a loan?
Pre-approvals can most often be expedited in a day or two upon receipt of your financial information. Approval times can vary depending on different circumstances, but our loan officers make every effort to pre-approve you as soon as possible.
What digital tools are available for the loan process?
At GMB we understand that establishing a New Home Construction Loan often feels daunting. That’s why we make it our mission to ensure the process is as easy as possible from application to closing.
We pride ourselves on making our loan process digital-friendly. You can apply for a New Home Construction Loan online through the GMB website in about 20 minutes. The process is designed to save you time and make the process easier. While you work on setting up your loan you can submit most of your paperwork right through our secure online portal.
You can also receive a custom home loan quote in a matter of minutes through our online mortgage rate calculator. This tool estimates your mortgage loan rate by exploring Home Equity Line of Credit loan details such as the purchase price, loan amount needed, your credit score and more.
Easily apply for a loan through our online loan application portal.
What can I expect in the closing process?
When your new home build project wraps up, Great Midwest Bank will be able to combine your construction loan and permanent mortgage into a single loan.
That means you’ll have “one-time closing,” i.e., you only have one closing appointment. You’ll also only submit your financial paperwork one time. You can save money on closing fees and also avoid needing to send documentation multiple times.
When you’re approaching closing day, you will be able to sign most of your documentation online. The result is a quick closing appointment, which people tend to not mind! After you’ve closed, you’ll pay a regular monthly mortgage payment.
If you’re ready to build your own home, talk to GMB
Building your own house takes a lot of effort and planning, but proves so rewarding once it is all complete and your family is settled in. If you’re ready to take the plunge and if you are ready to get started on a Home Construction Loan, begin by applying online.
You can also call up your local Great Midwest Bank or stop in to speak with one of our local loan officers. We know the process can feel intimidating. That’s why we work make your New Home Construction Loan process as stress-free as possible. Talk to us today to get started!
A version of this blog was originally published in January 2019. It was last updated in July 2022.