Austin Mortgage Loan Officer and Branch Manager Joel Richardson offers the following free construction mortgage FAQ to help you with your construction financing plans. Please feel free to use this resource as you begin to research your customer construction mortgage needs.
Q: How does the equity in my lot work?
A: If you’ve owned the lot for more than one year, we can use the equity that you have earned. If you’ve owned it for less than one year or are buying it as part of the construction loan, we will use the cost of the lot as the value.
Q: If I am remodeling, can I use my existing equity?
A: You bet. The remodel loan is simply a refinance loan where you get your equity. We take into effect your appraised value plus the costs of the remodel into the appraisal.
Q: When does the construction loan term begin?
A: A construction loan term begins on the date the borrower signs the loan documents. The term is typically defined in your builder contract plus added days for closing the permanent mortgage.
Q: Where are the funds sent?
A: At loan closing, the borrower signs a Construction Disbursement Account Information form that gives specific information about the bank account being used for the project. We recommend opening an account specifically for the project. If any change occurs to the checking account, you should notify us immediately in writing.
Q: What are hard costs?
A: Hard costs are direct costs associated with the labor and materials used for the actual construction of the home. Hard costs are also known as “direct costs,” “board and nails,” “on-site costs” and “hard cost improvements.”
Q: What are soft costs?
A: Soft costs are indirect or “off-site” costs not directly related to labor or materials for construction. Examples of soft costs include building permits and architectural fees.
Q: How does the disbursement process work?
A: Disbursements on a construction loan are designed to reimburse the borrower as the construction of the home progresses. Disbursement is usually handled in one of two ways: the first way is that specific invoices for work done can be submitted for payment. The invoice is compared to the budgeted amount to make sure costs are on track.
The second way, disbursement, is based on the amount of work that has been completed on the project. For example, if the construction budget is $150,000 and the project is 10% complete (based on the inspection), we will disburse the borrower up to $15,000 on the project. This disbursement would be in addition to any advances or deposits the borrower may be entitled to receive.
Q: Is there a set schedule for requesting draws?
A: There is no set schedule, but builders generally make draws at major milestones: concrete slab pour, framing, roof, electricals, etc. Most banks will not disburse funds until the items are installed (not delivered). This protects you and the lender.
Q: What does the borrower do if an extension of the construction loan term is needed?
A: Loans that go beyond the required completion date are technically in default pursuant to the Construction Loan Agreement. The moment you realize that the construction period may need to be extended, please call me to work out the issue. Most banks are pretty lenient as long as the project is moving along.
Q: What happens when the construction is complete?
A: When your project is about 80% – 85% complete, we will begin the process modifying the construction loan into the permanent mortgage: revisit the application, finalize costs and title, order new appraisal, and lock the permanent rate. As soon as the city gives the Certificate of Occupancy, your builder will want the remainder of the contract and will request the draw. Your loan does not have to be modified for him to get his funds. Most of the time, last disbursement and the final mortgage will happen around the same time, but not together.