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Home construction loans are for individuals who want to
actively participate in the building of their new house.
With home construction loans the homeowners now serve as
the construction managers responsible for the purchase of
materials, payment of laborer compensation and decides as
well, who to hire as piecework contractors. Aside from his
duties at the construction site, he will also arrange with
the bank or lender for a credit line in order to pay for
all the material and labor expenses incurred.
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Before applying for home construction loans, homeowners
should hire an architect to prepare the plans for his house;
complete with bills of materials, specifications, schedule
of work, schedule of payments, PERT/CPM or Pert Master,
cost bar chart, as well as organize the prepared plans ready
for a Building Permit application. If the homeowner decides
to do the construction by way of administration, then he
must hire an engineer who will supervise the construction
phase and be responsible that the construction is done in
accordance with pertinent plans and specifications.
Only then can the homeowner apply for a home construction
loan. The receiving lending institution will now assess
the total cost of construction based on the document presented,
including fees of the architect and supervising engineer.
Once the application is approved, construction can commence.
The homeowner is required to open a draw account or popularly
known as the credit line where he can withdraw funds to
pay for all expenses incurred during the construction phase.
Most home construction loans only charge interest on all
amounts drawn until the completion of construction. Following
a project's completion, the payment period begins. While
it is for a fact that a previous loan agreement is inked
between lender and homeowner prior to the start of construction,
a separate loan agreement is prepared to cover the construction
phase and a thorough property evaluation is conducted following
completion of the project.
In case the value of the constructed property exceeds the
borrowed amount, a late down payment will not be required
from the homeowner. However, should evaluation reveal the
construction falling short of the expected real property
value, the homeowner will be obliged to deposit pertinent
excesses from funding.
When home construction loans cover only the house while
the lots have been pre-purchased, the lenders will no longer
ask for down payments because the value of the lots serve
as sufficient equity. But if the home construction loan
covers both, certainly the homeowner will be required to
place a deposit - the amount to serve as the homeowner's
equity.
Say the expected value of your house and lot is $700,000
($200,000 for lot only) and you applied for a home construction
loan of $500,000 to cover construction cost. Since your
lot is pre-paid, the lender will no longer ask for a downpayment
because the value of your lot already exceeds the equity
requirement.
Homeowners availing themselves of home construction loans,
usually prefer a fixed-rate mortgage agreement because of
the uniform monthly amortization throughout the entire term
of the loan, besides that would amply protect them against
inflation. Although some homeowners may opt for an adjustable-rate
mortgage (ARM) agreement, if they have plans of moving to
another State after three years because of the low interest
rate offered by the ARM agreement during the first five
years of its coverage.
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