The loan process for a construction loan is not much different than a “regular loan”. There are a few additional items that are needed that relate to the construction project and appraisal, but the process and qualifications are very similar. If you qualify for a non-construction loan, you should qualify for a construction loan for a similar amount.
Most clients will get started on the loan process when the plans and budget are nearing completion. This way, they can get the loan approval out of the way. Once the plans and budget are complete, the appraisal can be ordered. The appraisal for a new construction loan does take longer to complete – 15 to 20 days is a typical timeframe. Once the appraisal comes back, the client will most likely have a conditional loan approval subject to the appraisal and a few minor items. Once the appraisal and any other conditions get signed off, closing can be scheduled.
An initial call with the loan officer is the first step. During that conversation, you will discuss the basics of the loan program and what it means for your specific project. At the end of the call you should have a good understanding of how the program works, how much money you would potentially need for closing, what your payments would look like (both during and after the construction phase), and what the next steps would be.
The need for a face to face application is no longer needed and very rarely done. Virtually all loan applications are done via phone, email, and fax. Once you have decided to move forward with the application and have sent in the initial items an additional conversation will firm up the loan structure, program type, and interest rate. In many cases, the final loan amount and structure of the loan is not finalized until the appraisal comes back since that may have an impact on the loan.
Documentation requirements vary widely depending on how you earn income and your specific loan request. Initially, just income documentation and a complete mortgage worksheet will be needed to start the loan process. Once the loan is started, additional items will be requested based on your specific financial situation. The following is a list of the types of supporting items that may be needed:
- Documentation to support income
- Documentation to support assets needed for down payment and reserves if needed
- Documentation to support monthly liabilities
- Construction plans and specs when available
- Detailed construction budget when available
- Signed construction contract
Timing for the construction loan process is highly dependent on when the plans and budget are available. Because the appraisal is based on the completed project, the appraiser needs the plans and budget to complete it.
There are two separate processes that occur during the construction loan process; loan approval based on income, assets, and credit and the appraisal process. Loan approval can take between two days and two weeks with normal loan volume and the appraisal generally takes 15-20 days from the point the appraisal is ordered. Those two separate processes can take place simultaneously. So if the plans and budget are complete at the time the client applies, a closing in 30 days or less is possible.
If you are purchasing a property that you are doing a construction project on, you want to give yourself extra time in the property contract to get approval and close. It will generally take longer to get the plans done and the budget developed than you think. Sometimes, if able, it is best to acquire the property first and close on the construction loan at a later date.
Once your loan is approved and any and all conditions have been cleared you can close your loan. You will need homeowner’s insurance. The insurance policy will vary depending on your project but may be a standard policy with construction coverage or a separate builder’s risk policy.
If you and your builder have agreed upon a deposit, a deposit of up to 10% of the construction budget can be given at closing.