Many dream of building their own home on a few acres with the exact layout and finishes they want. Moving in simply requires turning a key rather than new paint or new flooring, but how do you get from dream to reality?
“Some people come to their first meeting with me and have an idea of how much they plan to spend on their construction project, but a majority are coming for a pre-approval," said Matt Kahrs, loan officer in the FCS Financial Sedalia office. "For those who come with just a dream, we talk through these questions.”
Home Construction Questions
- Do you know where you want to build?
- Is that land owned free and clear or is there a loan against it?
- Have you obtained any bids or spoke to a licensed contractor?
- How much money is available for the down payment?
Kahrs provides potential borrowers with an example of an itemized cost estimate so they know how to break down the expenses when obtaining bids. FCS Financial does not require borrowers to hire a general contractor but it is strongly encouraged. Contact the local community or county to ensure that the general contractor is on their licensed and insured list.
Construction Loan Process
Once the borrower obtains all their bids, plans and completes the bid sheet, they come back to Kahrs to discuss loan terms. FCS Financial offers a one-time close that many other lenders do not. Many lenders typically offer a construction loan with closing costs. Then after construction, the borrower refinances the construction loan into a conventional mortgage with additional closing fees.
At FCS Financial, the construction period is approved with a variable interest rate. The length of the construction period is in addition to length of the final mortgage. The final mortgage rate is determined at the conclusion of the construction project.
Along with the bids, a potential borrower will need to bring their earnings statements and other documents on this checklist. Most situations will require a minimum of a 20 percent cash down payment. The information on the checklist provides proof that the borrower does have the down payment. The borrower’s down payment could be in an existing home or property the borrower needs to sell; exceptions may be made in some circumstances.
The FCS Financial credit team evaluates the loan application, bids and financial statements provided by the borrower. An “as will be” appraisal will determine the value of the property once the home is finished. It is important for the borrower to include accurate bids for finishes.
Upon approval, the borrower must obtain builders insurance. This protects them against any potential perils that may occur during the building process. FCS Financial requires all construction borrowers to obtain building insurance before construction can begin.
Once Home Construction Begins
Now construction can begin. The borrower must first expend their down payment funds and show proof of those expenditures. Then, they can begin to make withdrawals from the construction loan funds. Anytime a withdrawal is made, a final waiver of lien must accompany it. A waiver of lien, also called a lien waiver, states that the contractor retains no rights and has been paid for the good or service that they provided. Lien waivers are very common in the construction industry.
Prepare for the unexpected. Kahrs advises his borrowers to build in at least a 10 percent cost overrun into their budget. This allows for any unexpected expenses that come up.
FCS Financial conducts inspections of the construction throughout the project. This ensures that loan funds are being spent as stated in the withdrawals and lien waivers. Even with the inspections, a borrower should stay in contact with their loan officer regarding any delays in construction or unexpected expenses.
At the conclusion of construction, the loan will be converted to a conventional home mortgage. The dream is now a reality.
For more information on building a home or construction loans, visit with your local FCS Financial loan officer.
