If this is your first time building a new home, you are probably wondering how you will finance the project, pay your builder, his suppliers and acquire a mortgage at the end of the process. We can help make things easier to understand.
A construction loan is usually a loan that encompasses the lot and the house and is paid out into small chunks called “draws”. As Charlottesville Area Builders completes certain phases, the banker or bank’s inspection service will inspect the work to ensure that they are paying for only what is completed or partially completed, and pay out for those items in a “draw”. The draws traditionally add up to the total amount of the construction loan. So when you borrow, for example, $200,000 to build your new home, you are not really borrowing $200,000 the day you sign the papers. You are signing to borrow up to that amount, and Charlottesville Area Builders will “draw” on that amount each time we reach a milestone or specific timeframe. Some builders draw on a specific date (say the 1st of every month) and others draw at key milestones. On most of our projects, we draw at the following milestones:
- Completion of Foundation/Sitework
- Completion of Framing
- Completion of Rough-Ins (Electrical, HVAC, Plumbing)
- Completion of Drywall
- Completion of Home
Draws may vary depending on the size and complexity of the home, but three to four draws are typical in the majority of our builds.
Most construction loans are made through local community banks. Your average large national bank such as Bank of America or Chase do not typically engage in construction loans. Charlottesville Area Builders has great relationships with several local lenders
who can help you finance construction. These local lenders will typically offer a two-part approach to your loan. The first part of the loan will be a construction loan, which will allow you to purchase your lot and/or begin construction. This loan is interest only and can, in many circumstances be rolled into the cost of the home. If you are living in your current home or renting a temporary home, you obviously don’t want to have two housing payments. This is why the construction loan is made interest only and can sometimes be rolled into the cost of building the home. That way you’re not making two payments every month for 4-8 months while you build your new home.
When the home is completed, the construction lender will typically roll-over your loan into a “perm” or permanent loan which is your typical 15 or 30 year fixed rate mortgage. Rates are usually the same and at this time your typical “closing costs” will occur. Many times, the construction loan is opened without any money or minimal money down. However, each and every person’s financial situation is different and Charlottesville Area Builders and your lender can help guide you through the process.