My wife and I were out running errands yesterday. It was an absolutely gorgeous Fall day in Chicagoland. We weren't alone in our effort to get out and enjoy the beautiful weather either. The roads were busy and filled with cars.
As we drove along, we both noted the healthy spattering of new construction popping up all over. Once a very familiar sight, new home construction in our area had come to a screeching halt during the housing crisis.
The area in which we live, Will County, IL ... as well as the entire Chicagoland area ... had exploded with new construction during the housing boom. According to the 2010 Census, Will County, IL saw a growth in population of almost 35% over that reported in the 2000 Census. (That 2000 Census had reported an increase of almost 41% over the previous census.) So it's no wonder that Will County was named the 2nd fastest growing county in the State of Illinois during that time.
The sight of newly-framed homes, new developments, and a rising number of contractor's trucks on the highways in Chicagoland is very welcomed, as it's a sign of improving economic and housing market health. This new construction activity brings other good things along with it too, as its brought a flurry of calls and questions regarding new construction financing. Love it ...
As with many things in the quickly-changing real estate industry though, the new and current construction financing doesn't completely resemble the old. Here's some of the changes to be found ...
Years ago, vacant lots were often times owned or purchased by the homeowner. In this scenario, when the Individual (not a Builder or Contractor) owns a lot and chooses to build a new home on it, the typical financing route is a "6-month Construction Loan", secured by the Individual Lot Owner (Borrower) at a Bank or Mortgage Company.
During the construction process, the Individual/Lot Owner requests that 4 or 5 "payouts" be made. These "payouts" are funds from the loan that pay the Sub-Contractors for their completed work (supported by signed and notarized Contractor's Waivers). Payouts are usually preceded by inspections (performed by the Bank or Mortgage Company's Appraiser) verifying the payout of funds requested appropriately reflects the actual work completed.
The stages at which these "payouts" are considered, usually include completion of:
- Excavating and Foundation
- Rough Framing/Construction of the Residence/Garage
- Rough Mechanicals - Plumbing, Electrical, Heating and Air Conditioning are "Stubbed" in
- Insulating, Drywall, Millwork (Trim, Doors, Windows)
- Final Inspection - (100% Complete - Final Occupancy Permit)
After completion of construction, the Homeowner seeks a permanent, or "end loan" to pay off the Construction Loan. (Construction Loans are typically a short term, interest only type of loan ... not intended to be for a Fixed Term, such as 15, 20, or 30 years.) The Individual/Borrower's permanent Mortgage is then based upon a "completed" value, as determined by the Mortgage Lender's Appraisal.
This value estimate is typically in line with the Cost or Value of the lot, PLUS the Construction Costs (Labor and Materials). The new loan is then considered a Refinance ... and Loan-To-Value considerations are based upon the new Appraised Value.
However ... in today's environment, MOST of the building sites in Will County, and elsewhere in the Chicagoland area, are created and owned by Developers/Builders, who market/sell their products from Model Homes. Prospective Home Buyers contract for varying features and amenities offered in addition to the basic model chosen and semi-customize their new home according to their tastes and preferences.
In this scenario, the Builder funds his own construction process (usually with their own banking relationships, or cash), and when the home is completed ... sells the home outright to the new Homeowner. The Homeowner/Buyer secures traditional Mortgage financing, according to the agreed-upon Sales Price, and closes after the Final Occupancy Permit is issued and the home is complete.
So what are your current financing options if you own your own lot in Will County or Chicagoland and wish to hire your own Contractor to construct a new home on that lot?
I have good news! Another loan option exists and is available to you in this building/financing scenario. This loan option performs as a combination of the two forms of financing related above. It's known as a "Construction to Perm" loan.
A "Construction to Perm" loan provides the money needed during the construction period and then converts to a permanent (End Loan) after construction is completed. I'll be offering more information regarding this loan option ("Construction to Perm") in greater detail in an upcoming blog. Should you have questions or have a more immediate need for information or assistance, contact me at your convenience at any of the options found below ...
* Hoping to Buy or Build a Home in Will County or elsewhere in the Chicagoland region? Contact Me! I'll put my 36 years of mortgage experience, knowledge, and expertise hard to work on your behalf.
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