Are you looking for a construction loan in California? Well, it has not been easy to find funding for a construction loan lately, but there are some sources starting to make funds available.
If this is the first time you have looked for a construction loan, there are some details that you need to know.
First, there are generally three parts of getting a construction loan approved. The first part is the credit approval. Credit approval for a construction loan is similar to getting credit approval for a mortgage. The lender will look at your capacity to re-pay (employment, income, debts, repayment history, etc.).
The second part of a construction loan approval is the general contractor approval. The lender will usually like to see the contractor's resume, list of projects completed, credit history, licensing, and insurance coverage.
The third part of a construction loan approval is the project approval. The lender will want a copy of the plans, construction contract, permits, receipts for payments, and a list of building materials.
Once these three parts of the construction loan are approved, the lender will begin disbursing the funds. The first disbursement will pay off your existing mortgage, if you have one. The exception to this disbursement would be if they approved it as a second mortgage (rare).
The payment you make for a construction loan is similar to that of a payment on a home equity line of credit - you only pay interest on the amount disbursed.
For example, If you are approved for a $750,000 construction loan, but only $300,000 has been disbursed, then you would only pay your monthly payment on the $300,000 disbursed.
Sometimes a construction loan will be set up with a reserve fund. The reserve fund is used to make the payments for you. A reserve fund is nice because it allows you to conserve your cash. On the other hand, if you do employ a reserve fund to make your payments, you will be paying interest on interest.
A construction loan usually has some built-in protection for the borrower: funds are usually not disbursed until an inspector inspects the property to make sure the work the contractor is asking payment for has been completed in a workmanlike manner.
After the project has been completed, you have three options as a borrower: pay the loan off, accept permanent financing from the construction lender (usually worked out prior to the beginning of a construction loan - called a construction to perm loan), or obtain a take-out loan (a loan from another lender to "take out" the construction lender). These choices are necessary because construction loans are usually written with a payoff date from six to eighteen months from the initial disbursement.
Here are some tips that will help you with your construction loan:
1. Do not start construction until your construction loan has been recorded. It makes the process much easier for you and the lender.
2. Find a general contractor with a strong resume and a good reputation for his work in your geographic area.
3. Be very organized with your documentation for the lender. The easier you make it for the lender, the easier it will be for them to approve your construction loan.
Here in August, 2009, the cost of construction has declined in California because of our economic downturn. Now may be a good time to consider building that new home or re-modeling the home you have!
Do you need help structuring a loan, or getting a rate quote? Call me at (650) 222-0386, or e-mail me.
This is not an offer for extension of credit or a commitment to lend. All loans must satisfy company underwriting guidelines. Information and pricing are subject to change without notice. This is not an offer to enter into a rate lock agreement under any state law.
