Mechanics Of Home Builder Construction Loans

“Here Are A Few Things To Be Aware of With Home Builder Construction Loans And How They Are Administered”

Institutional lenders can provide great rates on home builder construction loans. Just remember that there are some nuances to these programs that you are going to need to be aware of and manage to get the full value out of them.

First, the only reason the institutional lender is providing the construction loan to you in the first place is to be able to also issue a long term take out mortgage once the project is completed. This is a more profitable, long term asset to the lender.

In order to tie the two separate mortgages together to make sure they get all your business, the institutional lenders tend to use some of the following practices.

  • The home construction mortgage, even though short term in duration, will be written as a longer term mortgage.  In order to pay out the construction loan in favor of a long term mortgage at the end of the construction project, a prepayment penalty will be incurred.  But if you get the take out mortgage through the same bank or lender, then the prepayment penalty will be waved.
  • The construction loan can typically be secured for 75% of the completed construction appraisal value.  But the lender will only ever advance 60% to 65% as they retain 10% to 15% for a hold back and don’t pay that amount of financing out…unless you utilize their take out mortgage program.
  • You cannot get a construction loan in the first place unless you are able to financially qualify for both the construction loan and the take out mortgage at the same time, setting everything up for one to flow into the other.

There is absolutely nothing wrong with this approach, but it does place restrictions on you that you should be aware of from the outset.  Taking a bank construction loan and not paying it out with their take out mortgage is likely going to be expensive, even if you’re able to find a cheaper long term mortgage rate prior to the completion of construction.

There are other things to consider for properly managing an institutionally issued construction mortgage in order to get the most benefit out of the lower rates they provide.  If you’d like to understand more about this form of construction financing and how to best use it to meet your need, please give me a call and we’ll go through everything together.

Click Here To Speak With Construction Mortgage Broker Joe Walsh