Here in Florida we reach a point in life when we design a home, find a builder and attempt to get a mortgage that will pay the construction person, and when it’s done, we move in. The vehicle with which will do the funding of said project is called a “construction loan”.

Thanks to a close friend of my son’s, I spent the day yesterday finding enough about this undertaking to feel I should inform readers of just how simple this process really is.

I found myself back at a nationally known bank/lender known as IndyMac reading over their guidelines and requirements. The following is an overview of what is required to begin the loan process.

Before construction

Construction loans are sometiimes refered to as “story loans”. What this means is, the lender/bank needs to know the story behind the planned construction before they are willing to loan you money.

To begin the process, the borrower needs final plans, blueprints and specifications in addition to a detailed cost breakdown (from the builder/contractor).

Secondly, an Application for Construction Loan is submitted.

The borrower will be encouraged to set a time frame (the shorter the time frame the lower the interest rate during construction) and the process is underway.  The normal time frames offered are between six and twenty four months.

During construction

There are no payments due from the borrower during the construction phase. There are no application fees, draw fees, or inspection fees. 

IndyMac adds about $2000 for closing costs (normal amount), and the title and escrow fees are paid for by the borrower from the borrowers own funds at finalization. 

During the construction phase the interest rate is about 8.0 to 8.5 percent.  No payments are made; however, the interest is added to what funds have been used during construction.

When construction is 95% complete, the borrower may choose the specific loan program (fixed, adjustable, Option Arm etc.) and may then lock in at the prevailing interest rate.

Unlike a mortgage, a construction loan isn’t meant to be around for a long time. If you’re taking out a $100,000 construction loan for six months and you pay an extra 1% on the loan, it costs you an additional $250.

One side note, if the borrower does not own the property to which the home is to be built, the lender will include that amount in the loan. Also, if the borrower has a mortgage on the homesite, the lender will pay that mortgage to zero and include the payoff amount in the new loan.

Hopefully this short overview of the Florida construction loan process will cast some light on a subject that is often avoided so that more persons can build a home and find a construction loan.