New Construction Loan Guide
A Home Of Your Own
A custom-built home is designed to work with your lifestyle, reflect your taste and suit your needs. When building a home, you conceive the big picture and choose the finest details, from the size and location of the home down to the doorbell and bathroom faucets. Besides being designed especially for you, a new home can offer the advantages of energy efficiency, low maintenance and insurance rate savings.
Home construction financing is a specialty of the Marine Bank Mortgage Team. Whether you’re planning to build your dream home or just thinking about it, we can help. We can answer your questions and your builder’s questions, from ground-breaking to house-warming, so that your project keeps moving smoothly.
Construction Loans vs. Mortgages
When you purchase an existing home, the financing process is complete when the loan closes. With a construction loan, the closing is only the beginning. A construction loan is a short-term loan to fund the construction of your new home. When building is complete, your construction loan will be converted to a long-term mortgage.
Most construction loans have a term of six to nine months, depending on the complexity of the project. Many banks charge closing costs and require separate paperwork for both your construction loan and your mortgage loan. Marine Bank offers a single construction-to-permanent financing option to minimize your costs and maximize your time.
A construction loan functions much like a line of credit, with your loan amount being the maximum funds available. While you have a construction loan, you pay only interest on the money you have drawn. This means that your payments will be less than if you were paying both interest and principal. Interest is calculated on the money advanced during each billing cycle, not on the entire loan amount. You will receive a billing statement monthly.
If you choose to be an “owner builder,” you will act as your own general contractor and be solely responsible for completing construction on time and within budget. In most cases hiring a professional general contractor will save you money, time and headaches. General contractors can use their experience and established professional relationships to minimize material and labor costs and to stay on schedule. For you, that means minimizing your construction loan interest costs. When building a home, time is money, so you will want a contractor who can complete your home on time.
Your general contractor, suppliers and subcontractors will be paid as work on the house progresses. Your contractor will submit invoices to cover costs incurred. You will approve those invoices, and Marine Bank will pay suppliers and subcontractors directly. This process allows you to oversee construction costs, while ensuring that contractors are paid in a timely manner.
The mechanics lien law protects suppliers and subcontractors from clients who don’t pay their bills. Anyone who was not fully paid for work on a new home may file a mechanic’s lien, which secures interest in the real estate much like a mortgage does.
Marine Bank works to ensure that no liens are filed against your new home. Each time a payment is sent to a supplier or subcontractor, we ask for a signed lien waiver verifying that payment was received and that all lien rights have been extinguished. Similarly, when your home is complete, we ask your general contractor for a sworn statement attesting that all suppliers and subcontractors have been paid. Along with the lien waivers, the statement paves the way for finalizing your permanent mortgage.
The amount of your construction loan must be calculated very carefully. You will want to consider the cost of buying and developing the building site, soft costs such as permit fees, construction costs – including materials and labor for all of the subcontractors such as masons, electricians and landscapers – and the costs of financing. Your Marine Bank lending officer will work closely with you to determine an appropriate loan amount. It is a good idea to get this number ahead of time so that you will know how much home you can afford.
In addition to the pay stubs, tax returns and information required for a mortgage application, construction loan applications ask for detailed information about the house you plan to build. You will need evidence of your contract to purchase the land or a title to the land; a complete set of building plans; an itemized cost sheet; a detailed description of your building materials and specifications; and a copy of the contract with your builder. It is best to call us early in your planning process to ensure that your financing is in order.
When your new home is about a month away from completion, we will work with you to finalize the details of your mortgage. You will need to disclose any changes in your income or debt. Together, we will determine the amount of your mortgage, taking into account any cost overruns or additions to your building contract, as well as proceeds from the sale of any existing home.