New construction loan

[Van-Guard23]

DW and I are looking into a new construction loan for a house to be constructed by a builder/developer who is also selling the lot in a 55+ community in Central Texas’ Hill Country.

Having never used one before (our experiences are only with traditional home loans), I would be interested in reading about others’ experiences. I’ve read the following about new construction loans:
- higher costs and rates than traditional home loans and sounds like a niche product as not many major lenders seem to offer it
- one-time close and covers construction periods up to 12 months (can be up to 24 months) pay interest only during the construction phase
- generally no pre-payment penalties
- supports 30-day draw schedules; lender inspects construction progress prior to disbursing payments every 30 days
- can be rolled into a permanent loan/mortgage
- down payment can be between 15% - 20% of the loan

We thought about paying cash for both the lot and home construction but we would have to synch the sale of our house with the start of construction to have funds available for the start of the 30-day draw schedule. Liquidating non-retirement taxable accounts is a non-starter. We are seriously considering taking out a new home construction loan to alleviate some concerns with possible delays in selling our house in HI.

Any pitfalls or other considerations I should be aware of? Any other options?

 

[Clone]

Around here, you put a small amount down and the developer handles the construction loan side. I would not want to be on the hook for material costs for half a house if the developer or contractor goes bankrupt half way through the construction process.

We had a custom house built for us. I think we put down $10,000.

 

[tps7742]

We have been through this process in two different scenarios. In 2010 we had a custom home built in where the builder was self funded and he carried the construction loan. We found the lot we wanted and he purchased it handled everything needed until the closing on the property. This was in the Houston area and he was an established builder with a good reputation. Definitely a rare situation but it went very smoothly. The second time we were in the process of building our retirement home in a rural setting. All of the things mentioned above we went through except we were saddled with a two time closing in which was my mistake. Make sure to chose a one time closing. Even though we owned the property we built on for 16 years we still had to have it surveyed prior to the home build then again after the house was built. The first time to make sure the house wasn't located on any easements the second time was after the home was built. I would make sure you have an understanding of the draw process and try to keep them to a minimum. The inspection process is a necessary evil but can take time depending on you location. All of this was a pain but we maid it through it. We had an Appraisal prior to the home build and then a market Appraisal after it was complete prior to closing. We also chose a home loan due to the low interest rates and we didn't want to pull our accounts down. Both scenarios were in Texas. One mistake we made is going through a small rural bank I had been doing business with in the past. They weren't accustomed to the larger loans in our case imho so we had too many requirements than I was accustomed to but we did over build for the area. We put down 25% of the loan amount. Good luck!

 

[Van-Guard23]

tps7742,
Thanks for the feedback. Our scenario is like your first where we’ll purchase the lot from the developer and the same developer/builder builds the house.

We are looking at a one-time close and will likely pay off the loan once we sell the house in HI. Wouldn’t want to pay any additional interest if we can avoid it.

Currently shopping for the new construction loan. Closing costs are looking like it’s going to be around $13-$15k, but it might be worth it to not have to worry about any delays in selling our house.

VG23

 

[Ronstar]

I had a construction loan when I was the general contractor on our house. During the course of the +- 16 month construction, I took monthly draws to pay for materials and subs. I had to do lien waivers and a lot of paperwork. Bank made no inspections. I converted to a mortgage when we moved in.

I assume your general contractor will do all of the paperwork for the draws?

Another option could be a personal loan or a personal line of credit using existing house as collateral. Draw from that to make monthly payments to the general. Then close out the loan when you sell your house. I'm not sure if this would be any better than a construction loan.

 

[Scuba]

I would find a HC who will carry the loan himself. If he's reputable, he should be able to get the credit. The paperwork is a huge pain and should be something he's familiar with.

 

[Scuba]

Sorry - typo - I meant GC. And obviously if he carries the loan, you'll have to pay the costs plus a small premium, but perhaps he can get a slightly better rate if he's an established GC.

 

[Van-Guard23]

I had a construction loan when I was the general contractor on our house. During the course of the +- 16 month construction, I took monthly draws to pay for materials and subs. I had to do lien waivers and a lot of paperwork. Bank made no inspections. I converted to a mortgage when we moved in.

I assume your general contractor will do all of the paperwork for the draws?

Another option could be a personal loan or a personal line of credit using existing house as collateral. Draw from that to make monthly payments to the general. Then close out the loan when you sell your house. I'm not sure if this would be any better than a construction loan.

Ronstar,
The developer/builder will be the contractor and I assume they’ll be doing all the paperwork for the draw schedule with the lender.

The line of credit will probably not work for us since we are going to be selling our house to pay for the majority of the new construction costs. We are planning on paying the loan off as soon as funds from the sale of the house becomes available.

VG23