No one likes surprises, not me, not your builder and certainly not you. I want you to be fully informed of the construction loan process before we begin. So here’s a brief description of about the application, closing and draw process.
Pre-Qualification – We start with a phone call. We will discuss your employment, income, cash on hand, credit, land and what you’re plans are. If it appears that you meet the guidelines, and you wish to proceed, we move to Step 2 and begin to collect documents.
Documentation Collection – I would need the following documents from you;
*Income– Your most recent 30 days of pay stubs and last two years of W-2’s. If you are self employed, own other real estate, and/or write off business expenses, we will need your last 2 years of tax returns. If you receive any income from social security, a disability or for retirement, you will need to send us your Award Letter stating what your monthly benefit is.
*Assets – All pages (even if they are blank) of your most recent 2 months of statements for all your cash accounts (checking, savings, investment and retirement).
*Identification – Federal law requires that I collect copies of your driver’s license or other picture ID.
*DD214 – If you are applying for a VA Construction Loan I will need a copy of your DD214 to secure your Certificate of Eligibility.
*Land – If you already own the land that you wish to build on, I need a copy of the deed, survey (if you have one), and settlement statement if you have purchased the land within the last year. You can use your land equity in lieu of a cash down payment. If you don’t own the land yet I’ll need the purchase agreement to buy it with at least 60 days to close. Here’s a blog I wrote how what to look for when buying land, https://activerain.com/blogsview/5190930/buying-land-for-your-new-home.
*Contract to Build – I will need a signed agreement for construction of the home. This contract needs to be with a licensed, insured, full time and active builder. It needs to be a “turn key” contract, meaning there should be no mention of other contractors, or the homeowner, doing any of the work. The contractor needs to be responsible for all the work needed to complete the home and get a certificate of occupancy.
Builder Approval – If your builder is not already on the lender’s approved list, then they must fill out a builder approval application. Builder approval is a little tougher in this Covid-19 age. Your builder should be just that, a builder. Not someone who just builds a home once in a while. They should have built homes of similar size as yours before. They should have good credit and have the assets/credit to get from draw to draw.
The application will be reviewed by the lender. This is a critical step. If a builder is going to have an issue with filling out the application and providing the needed documents, it best to find out at the start of the process.
Formal Application – The application will be emailed to you for eSigning. I will go over the application with you before you sign. We can spend as much time as you like going over any questions you have. Needless to say, it’s very important that you understand what you are signing.
Underwriting – The first step is to submit your application through the automated underwriting system (AUS for short) and receive an Approved/Eligible finding. If you application is approved then it will be reviewed by the human underwriter and given conditional approval. It is common for an underwriter to asks for additional documents for final approval.
Appraisal – A value is given to your project based on other recent sales of similar homes. The appraiser won’t find identical sales to your home, so they will make adjustment based on the guidelines the lender has given them. This is critical step. You should take a close look to the home sales in your area to make sure you are not overbuilding or adding costly upgrades that will not improve the appraised value. This will be a “subject to completion” report based on the plans and specs you and your builder provides us. Once the home is complete the appraiser will need to visit the now completed home, take pictures and write up a report to confirm that you built the home you gave them the plans and specs for.
Building Permit – At this point your builder should start the process of pulling the building permit. If you have applied for an FHA or VA you may have to pull the permit prior to closing on the loan and beginning construction.
Final Approval and Closing – Once your file has been given final approval we will set a date and time to sign all the closing documents at a title company of your choosing. The land will be put in your name (if it isn’t already), any lien(s) will be paid off, and construction can begin.
Draws for Construction – As work is completed, payments are issued to the builder, subcontractors and suppliers. The appraiser will do an inspection on every draw to confirm that the work the builder says is done is in fact done and done in a professional manner. Your builder will turn in a Sworn Statement and waivers of lien to document who has been paid and who has not. This is all for your protection. You don’t want a contract knocking on your door saying they were not paid and they are going to lien your home.
Payments during Construction – If you get a conventional construction loan you will not have a full mortgage payment during the construction phase of the loan. Instead you will be build for just the interest for the loan balance. If you have an FHA or VA loan your interest payments will be rolled into the contract to build.
Completion, C of O and Final Draw – Once the project is completed and the Certificate of Occupancy is issued, the builder will receive their final payment.
Modification – Your loan with the lender is modified from a construction loan to the FHA, VA or Conventional loan and your payments begin within 30 days. If you have chosen a 2x close loan you will need to refinance the construction loan into your end loan.
Again, this is just a brief description. I’d be happy to discuss your construction project and go into more in detail with you on the phone or in person. Give me a call at 586-917-5534.
Jerry Thomas, Construction Loan Officer NMLS #134090