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Unstanding the Costs of a Construciton Loan

Understanding the Costs Involved
· As you begin the process of building a new home, you'll want to understand the costs associated with your construction and permanent loans. You'll also need to know when the expenses occur so that you can prepare an accurate budget

· You can begin construction with as little as a 10% down payment or 10% equity in the total cost to acquire your lot and build your new home. If you don't own your lot, the first draw of your construction loan may be used to pay off your lot. There are instances that a borrower will not be required to have any money down.

· The interest rate on your construction loan is typically tied to the Prime Rate. You will be billed monthly for interest only, and your payments will be based on the current balance of your construction loan at the current interest rate for the previous 30 days. Borrowers can build in an interest reserve account to pay the interest payment during construction.

· When you finish building your new home, we will modify your construction loan to a permanent loan of your choice. Various options for locking in your rate are available depending on the product selected.

Total Project Costs

This is the cost to complete the home and consists of soft costs, hard costs, land value, closing costs, contingency and interest reserves.

Soft costs:Permit fees, engineering fees, architectural fees and other costs associated with building the home but not directly a part of the actual construction costs. Many times the borrower has already paid some of these costs. To consider these paid items as "equity," the borrower must document the cost with a bill and a canceled check or a paid receipt.

Hard costs:The actual cost of construction covering all materials and labor associated with the building of the home. Typically the borrower will enter into a contract with a contractor to build the property. Like a purchase contract for an existing home, this contract will set forth the work to be done and the costs associated with that work. All contracts must be for a fixed price; "Cost Plus" contracts are not acceptable. To support this cost, we require a signed and dated copy of the contract along with a detailed Line Item Cost Breakdown prepared by the contractor. All contracts and budgets must be reviewed by, and contain terms acceptable, to standard lending guidelines.

Closing Costs:Costs associated with the closing of the loan (e.g., title costs, loan fees, discount fees, inspection fees, appraisals, etc.)

Contingency:In certain circumstances a reserve account will be needed to cover unforeseen cost overruns in the construction of the home. A required 5% of the hard costs will be established in the Contingency Account (Contractors may hold a reserve other than what usually required by the Lender.)

Interest Reserve:At loan closing, an account is established to pay the estimated interest costs during the construction of the home. Since the borrower is only charged interest on the amount of funds disbursed, an estimate of the average disbursed amount is made. Our construction specialists will estimate that, on average, 60% of the loan amount will be disbursed during the term of the construction period. This interest reserve account is paid up front and is held to pay the interest during the time of construction.

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