Construction loans are making a comeback in the residential mortgage industry. As the Great Recession begins to thaw out the money from the sidelines is coming back in. And that doesn’t just include the money from Wall Street investors. Individuals who have been holding off on building that Second or Third home are now jumping off the fence. Residential Construction permits are increasing at levels not seen since 2008. This is good news for borrowers that have been waiting for the right time to build. Also it can be construed as bad news to that same group of borrowers as they have missed the “early boat.” Only the market can tell.
Another large group of people are those that have been waiting to remodel their primary residence. Interestingly enough almost half of all building permits and construction loans are being used to Remodel kitchens, add additional rooms, add landscaping and improve their home overall. Because people usually already have first mortgages the new Construction loan must pay off the existing lien and then provide an interest only line of credit to make the repairs.
There is a misconception out there that people applying for a construction loan will keep their primary mortgage in place but that is wrong. Almost 100% of lenders will require that their lien is in first position on the home which consequently will force the first lien and mortgage to be paid off and rolled into the new Construction Loan.
Once the new loan is in place it is fairly easy to access. Most lenders will run the disbursement of the loan through the builder. Once the builder has completed work on the project he will let the lender know who will then order an inspection and then will wire the funds to the builders account. Most lenders will charge the borrower an interest only monthly payment based on what has been drawn on the loan and not the entire loan amount.
Applying for a construction loan is fairly simple. The lender will require a normal loan application and documentation to support the borrowers income and liquid assets. This can be as simple as supplying your last two years of W-2’s, 2 most recent paystubs and 2 of your most recent bank statements. Also, if you are self employed the lender will require that you provide 2 years of Personal and Business Tax Returns (if applicable). Make sure you include all pages. In addition the lender will want to see bank statements from all retirement, stock, pension, etc.. accounts. In addition the lender will require a copy of the plans, cost breakdown and contract with the builder. The plans can be sent over as an electronic PDF file so this should be easy to email over to your Lender.
Judging from market conditions now is the time to jump off the fence and get new remodel or construction going as prices are still depressed and rates are low.