This is the second part of a two-part series on building your dream home. Read the first half of this article here.
You’ve decided what you want, narrowed your priorities, decided what you can afford, and met with your banker. Now the real fun begins as we take the steps necessary to turn a fantasy home into a reality.
● Meet with your architect. With your budget solidly in place, you can work effectively with an architect to design a custom home that meets your needs. A good architect uses your budget and your “wish list” to give you creative options and spur ideas.
● Complete your new construction loan application. When your plan is nearly finished, it’s time to apply for financing. Washington Federal’s construction loan application checklist will help you ensure that you have everything you need for that application appointment.
● Get your builder approved. Yes, the lender will need to review the financial health and reputation of your builder. Both you and your bank want a reputable builder who will finish the project on time and as planned. Your builder will need to provide documents to the lender for this purpose.
● Finalize plans and specifications. Once you and your builder are approved, provide plans and specifications, including the cost breakdown and draw schedule. At this point you will also get an appraisal based on those plans.
● Close on your loan. Once your loan has been approved, your lender collects your down payment and closing costs. Here at Washington Federal, we allow you to borrow up to 80 percent loan-to-value based on construction and land costs.
● Start construction! As work progresses on your home, the cost of construction is funded through monthly draws based on a percentage of completion. For example, if your home is 20% complete, then approximately 20% of the funds are available to you to pay your builder. During construction, you’ll pay the monthly interest owed on the amount of loan that’s been drawn upon. It’s important that the draws not out-pace progress on your home, or you can end up exhausting your funds before your house is finished. Here at Washington Federal, we do our own draws and inspections in order to save you time and money.
● Expect the unexpected. Every borrower is required to have a certain amount of funds set aside for contingencies – unexpected issues that arise during the construction process. Most lenders recommend setting aside at least 10% for this purpose.
● Pass inspection. Once construction is complete, both your city and your lender will inspect the property. You must pass inspection in order to move into the home and convert your loan to a permanent mortgage loan.
● Move in! Once your home passes inspection, your lender will collect insurance information, and determine any final construction interest and escrows owed. Your loan will then convert to permanent financing with monthly principal and interest payments. You may be paying down the loan amount with proceeds from the sale of your current home. In that case, your lender may ask you to sign modification documents that reflect the reduction in principal balance. Congratulations!
While the process above can vary from lender to lender, we here at Washington Federal do what we can to make building a custom home easier. We underwrite the entire project at one time, wrapping construction and permanent financing together. There’s no second loan, dual fees, or wasted time and effort. When you lock in your interest rate during processing, you’re protected if rates go up. After construction is complete, you can look forward to a single, fixed-rate mortgage. Call us if you have questions about building a custom home. Our branch managers are experienced lenders who are happy to help you explore your options or answer your questions.