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How do Personal Residence Construction loans differ from conventional?

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April 18 2009 - Dallas
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The issue on Contruction financing is obtaining Mortgage insurance.  If you have less tha 20% down you will likely have to go FHA new construction.  Not the easiest of loan programs to deal with.

If you are putting 20% you should be able to get financing from a local bank.
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May 27 2009
To begin with, if I am "hearing" your question right, a personal construction loan for residential construction is only a temporary loan.  They are normally taken out for a year with extensions if necessary based upon the pace of construction.  The offer higher rates than a "permanent" loan, and are set up so that you only pay interest on the amount of the construction loan in use or already "spent" each month and not the entire note amount.
Generally when financing a construction project, the bank will tell you that you are going to close one time on a "construction to perm" loan. This "perm" loan is the conventional loan you spoke of in your question above. This is the loan which will be based upon some ARM, or a 15, or 30 year term (generally speaking).  This loan will be your permanent mortgage and will be based upon current rates.  Unlike the construction loan where you  would be allowed to pay interest only, on the permanent loan you would be (now-a-days) required to pay principal and interest each month.  

Check out the link from bankrate.com regarding Constrution to Permanent Loans. Best of luck!
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May 27 2009
To: Maldomyr, Dreamhomehopeful&Paul

Without getting the particulars on your income, asset and credit profile I can only guess at why you are being offered what you are reporting.  That said it sounds to me as though you are not accessing the best remaining construction programs remaining in play.

Maldormyr... FHA has most definitely NOT pulled out of construction loans.  Whomever is giving you that information is flat out fibbing.  I would be very interested to find out:
1. If you've owned the land more than a year,
2. If you bought it with the right to build or if you went through the process of getting the legal permissions (aka the entitlement process),
3. What % of the land + construction cost does your down payment on your land constitute?

DreamHomeHopeful... The 25% down sounds suspiciously like a community bank loan.  You should be looking into the FannieMae backed HomeStyle Construction to Perm program.  It requires 5% down (loan to cost, aka land + costs) and is available through reputable lenders.

Paul... Construction to Perm is the way to go.  If your broker is not talking to you about Homestyle CtoP then go find a construction advisor who is can.  Everyone should remember that closing 2 loans will run up the costs... save money with convertable construction to perm loan products.

Let me know if I can help.

Sam
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May 24 2009
I am in the exact same situation. SunTrust screwed me at the 11th hour and I am negotiating with a local bank for the construction loan and at the same time working with a broker for the perm loan,  I should know in a week or two if the works.
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May 23 2009
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Just to add my 2 cents - we are in the middle of a painful construction loan process because the home we want to buy is mid-renovation and doesn't qualify for a conventional loan.  The construction loan requires 25% down payment (of the purchase price plus renovation amount) and no gift funds are allowed.  Plus, the builder must pass a minimum credit score check in addition to your credit score check.  It has been a major hassle.  Unless you have a lot of cash currently in your account, it may be difficult to obtain this type of loan.
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May 17 2009
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Just want to let you know that it's very hard to get a construction/land loan right now unless you inject 20-30% of your own money .I  purchased a piece of property and put 20% down just before the market dropped. I went to get a construction loan  and was told that I needed 20-30% down on the total amount I needed to borrow. I would have to pay off the land and the rest for construction. I unfortunately dont have 150,000-200,000 to start  the project and FHA has pulled out of construction loans. Unfortunately, my family and I are stuck. No money and a beautiful piece of property.  I don't know what to do . Can someone suggest who I can write  to. Everyone is getting money to buy houses but there are no programs for someone like me. 
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May 17 2009
Suggestion (Part 2):

C. Really pencil out your numbers!

I can't count how many contractors I know that have gotten financially damaged by a single family build.  I will tell you what I tell every tradesperson I meet who wants to do an owner build-- cost justify the project for real.

<> Sit down and figure out what you are looking to build (3 bed, 2 bath, 1400 sq feet, etc).
<> Go to the building department and make sure what you are planning is possible on that lot.
<> Break out every last one of your costs soft and hard.  Permitting, plans, copying to foundation, framing, roofing, rough plumbing, etc.  Go into every tiny cost and get a TRUE cost for your project.
<> .Get a real estate agent to give you an opinion of value on your project as if it were complete today.

Now ask yourself:

<> Is there a profit margin here?  If not then walk.  If you are not going to make any money or at least get an asset that is worth more than the loan you are getting it is not worth it (not to mention you won't get a loan).  Even if it will keep your crew busy, these sorts of projects should be avoided.

<> Are the cost numbers I am using the ones I would get if I bid out the project to contractors or subs?  If your numbers are 'low' because you can do it cheaper, walk away.  Keep in mind construction's two dirty words "COST OVERRUN" these things are a fact of life in construction.  Sure you can do it less than they are charging you... but only if nothing goes wrong.  If you have any experience building you will know that nothing ever goes right as planned.  A good project is one where even if things go wrong you come out ahead.

Conclusion:
Good luck to you on the project.
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April 22 2009
Hey again Whalen.

You sure can finance the land with the rest of your build as an owner builder.  As long as you have the income, asset, credit and experience profile that a bank is looking for you should be fine.

Suggestions (part 1):

A. Go find a local broker with construction loan experience

I would encourage you to go find yourself a local broker who can help you navigate the local banks.  Reason for this is that local banks usually have the most flexible construction loan standards and a broker familiar with their programs can help you shop the best one for your needs.

B. Look long and hard at the FHA 203(k) program

I know you want to build ground up, but you should strongly consider this program for rehab.  Since it is government backed it has more favorable conditions than strictly private programs and its rates are very hard to beat.  The down side is that you would have to find a fixer instead of a ground up build site, but based upon what I have seen here that is more your experience type (not to say you could not do a ground up).
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April 22 2009
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Thanks Sam! I wasn't sure of the correct terminology so I guess since I am going to build my own home it would be "Owner/Builder' right?  I am a partner in a home renovation businessbut the commute is killing me so I am looking at property to build my home on right now. I was going to ask my bank but I wanted some uninterested third party advice first.
Can the land be part of the construction or will i have to close/purchase on the land first then start the construction as seperate financing?
Thanks again!

J
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April 21 2009
Hey Whalen,

Not quite sure what you mean here, but I am going to assume you are talking owner/builder vs commercial spec.  In most ways these construction loans resemble each other.

Residential and Commercial Spec Construction loans:
<> Lend based upon the future value and cost of a project,
<> Are built around what is known as a draw schedule (as each phase of the project gets completed the loan provides funding),
<> Are all usually monitored in some way through bank inspections at each major point in a build.

The big difference is usually in scale when you are comparing the two and the ratio of loan to value or future value a lender is willing to go to.

Hope this helps a little.  If you have more info to share please post here.

Sam Lee
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April 20 2009
 
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How do Personal Residence Construction loans differ from conventional?
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