Isn't That Rich Podcast

Are you thinking about building your dream home? The construction loan process can seem intimidating, but with the right guidance and planning, it’s entirely manageable. Here’s a detailed look at the process, with insights from Ashley's experience and expert advice from Poli Benedict, a seasoned lender at Farmers State Bank.

Initial Steps: Preparing for Your Construction Loan

Get Pre-Approved

The first step in the construction loan process is getting pre-approved. This involves meeting with a lender to assess your financial situation and determine how much you can afford to borrow. Here’s what you need to know:

1. Documentation:
• Gather essential documents such as pay stubs, W-2s, and tax returns. If you’re paid biweekly, you’ll need three pay stubs; if monthly, four.
• Provide the last two years of tax returns and W-2s.
2. Initial Meeting:
• Schedule an appointment with a lender to discuss your project. Don’t hesitate to ask questions; understanding the process is crucial.
• Poli emphasizes the importance of this step, as it sets the foundation for your loan application.

Gather Your Bids

One of the most critical parts of the pre-approval process is gathering detailed bids from contractors. These bids provide an estimate of the total cost of building your home. Here’s a breakdown of what you need:

1. Comprehensive Bids:
• Obtain bids for every aspect of the construction, including foundation, plumbing, electrical work, and more.
• Consider getting a turnkey bid from a general contractor. This type of bid includes most of the work required for the construction, simplifying the process.
2. Detailed Estimates:
• Ensure the bids include specific details such as slab or block foundation, power, water, septic systems, and driveway.
• Poli recommends having all bids ready before submitting your loan application to avoid delays.

Submit Your Application

Once you have all your bids and initial documentation, you can proceed with the loan application:

1. Filling Out the Application:
• The application will be general and used for various types of loans, but you’ll specify that it’s for construction.
• Ensure all necessary information is included to expedite the process.
2. Title Work and Insurance:
• Clear title: Ensure your land has a clear title with no liens or encumbrances. The title company will verify this.
• Insurance: Shop around for builder’s risk insurance. This policy protects your project during construction.

Navigating the Appraisal and Closing Process

Appraisal

The appraisal process is crucial as it determines the value of your completed home and how much you can borrow:

1. Submitting Bids and Plans:
• Provide your lender with all your bids and the specifications of your house. These details are sent to the appraiser.
• The appraiser evaluates the projected value of the completed home. Poli notes that owning your land adds value, which positively affects your appraisal.
2. Understanding the Appraisal Value:
• You can borrow up to 85% of the appraised value if you own the land. If not, you’ll need an additional 15% of the land's purchase price and construction costs.
• Ensure the appraised value is higher than the actual construction costs to maximize your borrowing potential.

Closing Disclosure

The closing disclosure outlines all costs associated with your loan. Reviewing and understanding this document is essential:

1. Receiving the Disclosure:
• You must sign the closing disclosure at least three days before the actual closing. Poli advises not to delay this step, as it can affect your closing date.
2. Breakdown of Costs:
• The closing disclosure includes all expenses such as appraisal fees, title work, insurance, and other related costs.
• Reviewing this document thoroughly with your lender ensures you understand all charges and avoid surprises at closing.

Managing the Construction Phase

First Advance

Once your loan is closed, you’ll receive the first advance to start construction:

1. Initial Advance:
• The initial advance typically covers 15% of the project’s total cost. You’ll receive this amount in your dedicated construction account.
• Open a construction account to keep finances organized. Poli stresses the importance of this for tracking expenses.
2. Lien Waivers:
• Collect lien waivers from every contractor as proof of payment. This prevents any mechanics liens from being placed on your property.
• Submit lien waivers to your lender before receiving the next advance.

Progress and Inspections

Regular inspections and careful management of the construction timeline are essential:

1. Construction Timeline:
• Stay in close contact with your lender and contractors to ensure the project stays on schedule.
• Plan for potential delays by keeping lines of communication open and adjusting timelines as needed.
2. Final Inspection:
• Once construction is complete, a final inspection ensures everything meets the required standards. This step is crucial for transitioning to permanent financing.

Transition to Permanent Financing

Completion

After completing the construction, your loan will transition to permanent financing:

1. Permanent Loan Application:
• Apply for permanent financing based on current interest rates. Poli explains that this rate might differ from your construction loan rate.
• Submit another application for permanent financing and provide updated documentation if necessary.
2. Final Appraisal and Title Work:
• A final appraisal confirms the value of your completed home. Updated title work ensures there are no new liens or issues.
• Ensure your property is free of any unresolved issues before finalizing the permanent loan.

Tips for a Smooth Process

Stay Organized

Keeping all documents, bids, and lien waivers in a dedicated folder is essential. Poli recommends maintaining both physical and digital copies for easy access and backup.

Communicate Regularly

Regular communication with your lender and contractors helps manage expectations and timelines. Poli emphasizes the importance of asking questions and seeking clarification throughout the process.

Plan Ahead

Secure all necessary bids and insurance early to avoid delays. Poli advises shopping for insurance and gathering bids before submitting your loan application.

In Summary

Building a home is a significant undertaking, but with the right preparation and support, it can be a rewarding experience. By following these steps and working closely with a knowledgeable lender like Poli Benedict, you can navigate the construction loan process with confidence.

For more detailed guidance, reach out to Poli Benedict at Farmers State Bank, and explore the construction loan resources they offer. Happy building!