How long are construction loans?

Generally, they are available for periods of one year.

How much down payment will I need?

Typically, about 20%.

Can I borrow the down payment?

Usually, yes. If there is enough equity in your present home, you could consider a home equity loan.

What interest rate should I expect to pay?

Rates for construction loans vary between ¾ and 1-1 ½ % or more over the prime rate. Expect to pay other closing costs such as points, title insurance, recording fees, survey, appraisal and the like.

How do I qualify for a construction loan?

Your lender will want to know that you have the financial ability to support your existing mortgage and payments on the construction loan.

When are funds disbursed?

The funds you borrow are drawn according to an agreed upon schedule between your builder and lender. At the completion of each phase of this "draw schedule," a bank inspector confirms that the scheduled work has been completed. Then funds are released to pay for labor and materials used through that phase.

When do I make payments on the construction loan?

Usually, interest only payments are made monthly on the amount disbursed to date. Assuming an annual interest rate of 9 ¼% and you draw $60,000 the first month, you would owe about $462.50 at the end of the first month. If you spent an additional $35,000 the next month, you would owe interest on the total of $95,000 drawn and owe about $732.29. This would continue until completion of your home.

What happens when my home is completed?

The principal amount of your construction loan is due and is most often paid with funds you borrow on your permanent, or "end," loan.

Does the construction loan automatically convert to an end loan?

No. It's at this point that the most significant difference between a 1-step and 2-step loan becomes apparent. If you have chosen a 1-step loan, the construction loan rolls into your end loan. Your closing took place when you borrowed construction funds. It was then that you signed construction and permanent loan notes and mortgages in fixed amounts.

How does a 2-step loan program differ?

Theoretically, you could have 2 lenders, although this would not be cost effective. Essentially, the 2-step program means you have two closings. The first takes place when you borrow funds for construction. The second takes place when you borrow funds for your permanent loan.

What are the advantages and disadvantages of each type?

The 1-step program guarantees permanent financing in a fixed amount. It generally requires no additional financing fees upon conversion, although the lender will usually want an updated title policy. With the 2-step program, you may pay some financing costs twice, but actually spend less out of pocket. Suppose, for example, that the purchase price in your building agreement is $300,000 and you are borrowing 80%, or $240,000. Let's say that after you've taken your construction loan, you decide you want to upgrade your kitchen cabinets at a cost of $5,000. With the 1-step loan, you've already signed the permanent note and mortgage in the amount of $240,000. That means you would have to pay the additional $5,000 with your own funds. With the 2-step program, any additions you make during construction are added to your original price and given to your lender prior to closing on your permanent loan. Presuming an appraisal supports the value of your additional improvement, the lender will then lend you 80% of $305,000, or $244,000.

What if I want to take a 90% end loan?

Using a simplified example, let's say that your new home costs $300,000. You will need approximately 20%, or $60,000, as a down payment for your construction loan. When your permanent loan begins, you would only need 10%, or $30,000, as a down payment. In effect, you would get money back.

Do all lenders offer the 1-step and 2-step programs?

No. But you should explore both options thoroughly before committing to one or the other. Ann Arbor Builders, Inc. works with several area lenders and will be happy to provide you with names and numbers.

What if I can't qualify for payments on both my present home and my new home or have neither enough cash or equity in my home to use as a down payment?

Then you should discuss this with your builder. Many builders today, particularly the larger companies, finance construction and build the associated costs into their homes. Ann Arbor Builders, Inc. has the financial strength to finance construction. We'll be glad to discuss this option with you.

403 S. Fifth Avenue
Ann Arbor, MI 48104
Phone: (734) 761-8990