If you have never built a new home before, you’re probably wondering how you’ll finance the whole project, pay your builder, his suppliers and end up with a mortgage at the end of all this. Hopefully we can help make things a little easier to understand.
A construction loan is usually a loan that encompasses the lot and the house and is broken up into small chunks called “draws”. As the builder completes certain items, the banker or bank’s inspection service will inspect the work to ensure that they are paying for only what is completed or partially completed, and pay out for those items in a “draw”. The draws traditionally add up to the total amount for the construction loan. So when you borrow $200,000 to build your new home, you are not really borrowing $200,000 the day you sign the papers. You are signing to borrow up to that amount, and your builder will “draw” on that amount each time they reach a milestone or specific time. Some builders draw on a specific date (say the 1st of every month) and others draw at key milestones. On most of our projects, we draw at the following milestones:
- Permit/Construction Start
- Completion of Foundation/Sitework
- Completion of Framing
- Completion of Rough-Ins (Electrical, HVAC, Plumbing)
- Completion of Drywall
- Completion of Home
Of course, some builders also finance construction of new homes. The builder owns the lot and home and you contract to purchase the home. The builder finances construction with their own funds and/or their own construction lender. In some cases, where the buyer is a first time buyer without a large down payment this is the only way to purchase a new home. The builder and it’s lender will often require a down payment, as the days of absolutely no money down are over. But for FHA buyers with 3-10% down, this is another option. Unfortunately not all builders have access to these construction loans as credit has tightened, however the most fiscally responsible of builders still have access to these construction loans. We are proud to say Silverthorne does as well.