Mistakes to Avoid for Construction Loan

by : Chris Esposito

The number one mistake, hands down, that most people make when building their home is not allowing enough time to get through the process, especially for those people who are acting as an owner-builder and building without a general contractor.

Building a new home, and obtaining a loan to do so, is not as simple as going out and obtaining a mortgage to buy an existing home. You CANNOT do it all in 30 days. Period. Do not expect to do so. This pre-building and planning stage is often cited as the most stressful period of most people's building experience.

If you are buying a piece of land and wrapping its purchase into your construction loan, then you must be sure you allow enough time to get to closing on your construction loan before your land purchase contract expires. Do not let the seller or the seller's real estate agent pressure you into a 30 day contract. This can be tricky, as most sellers and agents have no idea of the construction planning process you will be going through.

They only know that the last time they bought or sold a house it took about 30 days. Therefore, you will need to negotiate more time to get to closing unless you already have finalized blueprints, budgets, and permits. Realistically, sixty to ninety days should be the minimum contract period for the land, depending on how well prepared you are.

As mentioned, this is tricky. The complicated part is that often you will not finalize your home plan until you decide on the land. Usually, this is due to the uncertainty of the foundation plan - does the land slope or is it flat. You will need to decide quickly if you do not already know this answer.

Now that you have decided on the land, you have a ton of work to do as quickly as possible. Getting your bids (properly) to complete your budget is the single most important thing you need to do in the whole construction planning process, especially for owner builders. And, it can rarely be done in just a couple weeks.

And to make matters worse, when the clock is ticking towards your contract's closing date, you will often be pressured to skip a step or let some of the budgeting and bids slide. This is construction project suicide. Proper budgeting is vital to building a new home. Even if you are hiring a licensed general contractor to do the work for you, you will need to take the time to flush out the exact budget and sign a proper contract for all of the work to be done.

You need as much time as possible to complete your budget, understand the county building and permit requirements, perform any soil or percolation tests, and complete your loan documentation. Sixty days will seem to fly by.

If you cannot get more than 60 days on your land contract, you will need to have much of your budget already in place. This means committing to a home plan as early as possible and getting as many of the bids that are not dependent on the lot ahead of time. Then, you can focus on just the remaining items to complete the budget.

The best course of action is to get pre-approved for your loan once you have decided to build a home so that you know your maximum budget you can qualify for. This way, you can properly set a maximum price for the lot (based on what you have seen in the area) and then choose an appropriate home plan that can be built for the remaining budget or less.

You will now be able to complete much of the planning while you are shopping for land. You can even decide to only shop for land that is flat or sloped or that meets whatever other requirements you may have.

The important thing to understand is that these decisions, which may be some of the biggest of your life, must be made quickly if you have not planned correctly or if you are under the pressure of a closing date. Do everything possible to organize your project before the clock starts counting down towards the seller's closing date.

Once you have a lot, a home plan and a budget, you will still need to complete the rest of the loan process. You will work with your loan officer and loan processor to provide the required documentation to complete the loan.

The appraisal and title work will have been ordered by the processor. You will need to schedule an appointment with the appraiser to review your plans and deliver the appraisal fee. You may also need to contact the closing agent to be sure they have all of your contact information.

While the appraiser and closing agent are doing their jobs, you will need to submit any remaining income documentation, asset statements, or other requested information. You will also need to arrange your insurance and permit applications during this time. As you can see, you will be busy. This is the trade-off for the chance to build the exact home that you want.

Once the appraisal, title work, budget, and all other required documents are in the hands of the lender, the file can be submitted to final underwriting. To be safe, expect that you will close in approximately ten days to two weeks from this point, barring unforeseen complications.