Author: Home Construction Loans Explained

Financing a Fixer-Upper

Last weekend I was at a neighborhood summer party and had a chance to catch up with one of my neighbors, a real estate agent whom I’ve known for years. We talked about real estate (of course) and what’s happening in our small town. We both understood how this year is turning out to the most competitive real estate market in years. The inventory of houses for sale is at historic lows. There are more buyers than homes for sale which is driving up prices. She explained it’s not unusual for sellers with a home priced at market value to have an offer within days of being listed.

I live in northern New Jersey where there are a lot of older homes. Many have not been updated in decades or worse have neglected maintenance. It’s getting more difficult for buyers to find an older home that has been updated with modern features and state of the art amenities all at an affordable price.

However, for buyers with vision and a plan there are unique home buying opportunities in this challenging market.  Fixer-upper homes in good neighborhoods are being purchased in “as is condition” and renovated by buyers who know what they want to do and how to get it. Or, instead of selling their current home and trading up, some home owners have decided to renovate & revitalize their old home into a newer 21st century smart home. Thank you HGTV for the inspiration!

Financing a Fixer-Upper with a Construction-to-Permanent Mortgage

For buyers who want to build, renovate or create their 21st century smart home a construction-to-permanent mortgage loan may be the way to go. This loan finances both the construction phase and the permanent mortgage with just one closing and with one competitive fixed rate. Interest-only payments are made on the outstanding balance during the construction phase. Making interest-only payments during the construction phase gives the home owner a break from the full loan amount, as they pay just the interest on the amount that accrues during the construction phase.

General contractors like construction-to-permanent mortgages too. They do not have to finance the project. The loan is made to the home owner and disbursements are made to the general contractor to cover their expenses, material costs, pay workers and subcontractors.

Another benefit is a home owner can obtain financing at a much more favorable rates and terms on their home construction than a general contractor who is typically relying on a business line of credit to fund construction. The home owner can also lock in a rate before construction starts which can be big advantage if rates are expected to go up during the construction phase.

Construction-to-permanent loans also offer another very important advantage – the simplicity and savings of one loan closing. When the project is complete, the loan automatically converts to a permanent fixed-rate loan with principal and interest payment, just like a traditional mortgage.

Qualifying for a Construction-to-Permanent Mortgage Loan

The requirements to qualify for a construction-to-permanent mortgage are similar to a traditional mortgage. The loan amounts are determined by assessing the loan-to-value ratio, considering the acquisition cost (purchase of land plus cost of completing the project) or the appraised value of the property after construction is completed. Other requirements include Debt-to-Income ratios, credit rating and liquid assets for reserves and closing costs. However in some cases the closing costs and the reserves can be included in the construction-to-permanent mortgage effectively making 100% financing an option.

A construction contract, construction cost breakdown and a set of plans and specifications will be needed to apply for a construction-to-permanent mortgage. The bank’s appraiser will need these documents to determine the value of the home after the construction is complete.

Buying a fixer-upper provides many rewards and personal satisfaction, but it can be challenging and complex. I’ll provide value and expert advice on financing the construction. The home owner can focus and enjoy their project with peace of mind knowing the construction loan and permanent mortgage have been approved, the rate has been set for both and details of funding each stage of construction, from start to finish have been worked out ahead of time.

ABOUT: Arthur Aranda, NMLS #1042093 is a home construction loan specialist who has worked in the mortgage business in various roles and capacities since 1986. Aranda is also a Certified Financial Education Instructor and provides First Time Homebuyer Seminars.  For more information on construction loans or to schedule a FTHB seminar please call Arthur Aranda at 201-741-1537.

Bill Gates -Why The World Is Getting Better

I’m happy to be a part of Rotary International when I’m not financing home construction

Rotary Club Of The Palisades

Bill Gates spoke at the June 12th, 2017,  Rotary International convention, which was attended by over 25,000 Rotarians and said that there are ” 16 Million Reasons To Be Optimistic About Polio” (link below)

thhttps://www.linkedin.com/pulse/16-million-reasons-optimistic-polio-bill-gates

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Made in America – Residential Construction

Residential home construction, which includes knock-downs, major renovation and rehab projects, generates substantial local positive economic activity by creating income and new jobs for residents and additional revenue for local governments. Residential construction has an immediate and sustainable positive economic impact on local communities. In the coming years we can look forward to substantially benefiting from renewed growth in residential home construction. This is because the Northeast metropolitan area will continue to be a desirable place where homeowners find good job opportunities, convenient shopping, excellent schools and many recreational choices. This metropolitan area is large enough and diverse enough to include the places where construction workers can live locally while pursuing similar goals and opportunities.

According to the National Association of Home Builders, the estimated one-year impact of building 100 single-family homes in a typical metropolitan area include $28.7 million in local income, $3.6 million in taxes and other revenue (permits & fees) for local governments, and 394 local jobs. Residential home construction also creates annually recurring positive economic activity. In established neighborhoods there is not much brand new construction, unless it’s a knock-down. Builders are busy renovating or rebuilding older existing homes.

The gentrification of an area, although controversial, creates sustainable positive activity as new homeowners participate in the local economy. Restaurants and local upscale boutique businesses typically follow or precede the increase in residential construction taking place in a gentrified neighborhood. Higher property taxes are expected as the value of newly renovated homes rise. I think any way you look at it, building or renovating a home is a quintessential Made in America product.

Unless someone has all the cash needed, almost all residential home construction projects, one way or another, are financed. A One-Time Close” Construction to Permanent mortgage makes financing simple and more affordable because there’s just one closing for both the construction loan and permanent mortgage. The homeowner can focus on their project with peace of mind knowing their construction loan and permanent mortgage are approved, the rate for both are set and details of financing each stage from start to finish have been worked out ahead of time. Now that’s a good deal!

Keep it SIMPLE in 2017 with a One-Time Close Construction-Perm Mortgage

This loan has one rate and one closing for the construction and the permanent mortgage. The loan can be used to finance the purchase of the property and the construction costs. If the property is already owned, any equity created when the construction is complete can be used toward the total equity to finance the transaction, effectively creating a 100% financing option. During the typical 12 month construction phase interest-only payments are made on the funds advanced to pay for the construction. A loan disbursement worksheet is set up prior to closing so both the borrower and builder will know how the construction will be funded. When the home is built the construction loan converts to a 30 fixed rate mortgage.

Depending on the borrower’s needs, the interest rate on this loan gets set and locked-in either at time of application or prior to closing. There is one rate for both the construction phase and permanent mortgage. During construction, interest only monthly payments are made on the outstanding principal balance. The balance on the construction loan will increase as draws are taken out to pay for the construction. When the construction is finished and the certificate of occupancy is issued the loan converts to a permanent mortgage at the same rate the borrower received when they closed the loan.

At application, the borrower will need to provide a signed construction contract and budget, signed property purchase contract, if applicable and a set of building plans. Building permits are not needed to apply but will be required before any actual construction may begin.

Because of the lengthy time frame involved with construction, up to a year or even longer in some cases, there are special considerations when it comes to construction financing. Each Construction to Permanent mortgage is structured to meet the borrower’s specific needs. Being prepared to make the transition financially and physically while a home is being built or undergoing major renovation can require some juggling and careful planning.

If the borrower wants to wait to sell their current home until the new home is ready to move in, they must qualify for the new construction loan while still making payments on their existing home even if it’s listed for sale but has not closed. Borrowers who cannot qualify this way may need to consider selling their current home before construction begins and temporarily rent or live with family until the new home is ready.

On a construction purchase transaction, the borrower must put down at least 20% of the total acquisition cost, i.e. the combination of the property contract and construction contract. The lender will typically finance up to 80% of this amount. Construction costs are generally categorized as   “hard costs” and “soft costs.” The materials and labor are hard costs and things like design plans, architectural drawings, engineering fees, permits, etc. are soft costs. Some soft costs can be financed if they are included in  the construction contract.

The borrower may need the proceeds from the sale of their current home to help with the down payment on their new home. If that’s the case they’ll need to sell before they close their construction to permanent mortgage.  In addition to the down payment the borrower will need money for closing costs and reserves. With only one loan needed for both construction and permanent mortgage, closing costs are much less than when two separate loans are used to finance the project.

The borrower must also have additional funds on hand to cover any potential cost overruns and may need reserves to cover certain housing expenses during the construction phase.  The reserve requirements depend on the transaction and are calculated by the lender before the loan is approved so the borrower is prepared upfront for what is needed.

Building a new home or doing a major renovation can be a complex process. A one-time close construction to permanent mortgage makes the financing simple. The borrower can focus their energy and time on their project with peace of mind knowing both the construction financing and the mortgage are approved, the rate is set and the details for financing each stage from start to finish have been worked out ahead of time.

ABOUT: Arthur Aranda has over 25 years of mortgage banking experience and works extensively with home builders and homeowners on financing home construction and renovation projects. Aranda is also a Certified Financial Education Instructor and provides First Time Homebuyer Seminars.  For more information on construction loans or to schedule a FTHB seminar please call Arthur Aranda at 201-741-1537.

Home Construction & You (2 min read)

For a home buyer having a new home built or buying an existing older home is a big decision. More first time home buyers are even considering new construction is a great opportunity to personally design their dream home and save big money down the road on the repairs and maintenance costs of owning an older home. Here are a couple things to think about if you are considering new home construction:

Customization

New construction allows you to design everything from the roof to the basement. You can choose your floor coverings, windows, doors, cabinets, appliances, bath fixtures, built security and entertainment systems and a lot more. Some predesigned home floor plans even allow for customization of interior space like the location of walls and number of bedrooms and bathrooms. Brand new homes come with modern energy efficient heating and cooling and Smart Home technologies. All can be designed to your specification when you build a new home. All customization items should be factored into the total construction cost budget.  This is very important when selecting custom items to avoid any unexpected financial issues during construction.

For economic and social reasons it seems fairly certain, there will be more multi-generational households in the years to come. New construction can be designed specifically for multi-generation occupancy, or with that option to convert later. They may even sell for more someday when it comes time to move (something else to think about!)

Financing

Unless you plan to use personal funds for everything, financing will be a critical part of the home construction process. Lenders require more documentation than they did a few years ago. So have your paperwork in order and ready to go. Your lender will tell you what’s needed. Speak to a mortgage loan officer with construction lending experience. An upfront review of the documentation and a prequalification interview will help you determine an affordable budget. This, in turn, will help you to determine what type of home you can build.

Building a new home provides many personal rewards and personal satisfaction but it’s also complex and can also be costly. A “one-time-close” construction to permanent mortgage can help keep monthly expenses low with interest-only payments during the construction phase.  On a purchase, you can finance up to 80 percent of the land and construction costs. If you own the land (or house if it’s a knock-down) you can finance 100% of the construction costs but you will need to pay off any outstanding loans on the land. This can be included in the new construction to permanent mortgage. When the 12 to 18 month construction phase is complete the construction loan converts to a permanent mortgage with principal and interest payments.

One last thought. Don’t be in a hurry. The planning out, design and construction of a new home can take a lot longer than you might think. Expect delays. In fact, plan ahead for them if you can.

ABOUT: Arthur Aranda has been in the mortgage business for a long time in various roles and capacities. He specializes in home construction and renovation finance. Aranda is also a Certified Financial Education Instructor and provides First Time Homebuyer Seminars. For more information on construction loans or to schedule an FTHB seminar please call Arthur Aranda at 201-741-1537.

A Realtors’ Quick Guide to a Construction to Permanent Mortgage

When you combine a permanent fixed rate mortgage with a short term home construction loan you get a hybrid loan package that may fit your client’s needs perfectly. A Construction-Permanent Mortgage can finance both a home purchase and any construction or renovation costs, including a total knock-down. For homes already owned, equity created by the renovation can be applied to the total equity needed to finance the loan, effectively creating a no-down payment option. During the construction phase interest-only payments are made on the funds advanced to pay for the construction. A loan Disbursement Schedule is set up prior to closing so the borrower and builder will know how the payments will be made during construction. When the construction is done the interest-only loan converts to an amortizing 30 year fixed rate mortgage.

The rate on a Construction to Permanent mortgage can be locked at application for 60 days or longer if needed. The rate stays the same when the loan converts to a permanent mortgage.

To apply, your client will need a 1) signed construction contract & cost breakdown with the contractor, 2) a signed property purchase contract and 3) a set of building specs & plans. Permits are not needed to apply but will be required before construction may begin.

Because of the lengthy time frame involved with construction, up to a year in some cases, there are special considerations when it comes to construction financing. Each Construction to Permanent mortgage is structured to meet the borrower’s specific needs. Being prepared to make the transition financially and physically while a home is being built or undergoing major renovation can require some juggling and careful planning.

 

If the borrower waits to sell their current home until the new home is ready to move in, they must qualify for the new construction loan while still making payments on their existing home even if it’s listed for sale but has not closed. If the borrower cannot qualify this way, they may need to consider selling their current home before construction begins and temporarily rent or live with family until the new home is ready.

On a construction purchase transaction the borrower must put down at least 20% of the total Acquisition Cost, i.e. the combination of the property contract and construction contract. The construction-to permanent mortgage can cover up to 80% of this amount. Construction costs are generally categorized as   “hard costs” and “soft costs.” Construction materials and labor are hard costs and things like design plans, architectural drawings, engineering fees, permits, etc. are soft costs. Some soft costs can be financed if they are included into the construction cost breakdown.

The borrower may need the proceeds from the sale of their current home to help with their down payment on the new home. If that’s the case they’ll need to sell before they close on their construction to permanent mortgage.  In addition to the down payment the borrower may need money for closing costs. The borrower must also have additional funds on hand to cover any potential cost overruns and may need reserves to cover certain housing expenses during the construction phase. The reserve requirements depend on the transaction. During the pre-qualifying interview the borrower is prepared upfront for what is needed.

Building a new home or doing a major renovation can be a complex process. A one-time close Construction to Permanent mortgage makes the financing simple. Your client can focus their energy and time on their project with peace of mind knowing both the construction financing and the mortgage are approved, the rate is set and the details for financing each stage from start to finish has been worked out ahead of time.

Talking about a Construction to Permanent Mortgage

 

Are you planning a major home renovation project or new home construction on land you own or want to buy? There are special considerations when it comes to the construction financing.

A Construction-to-Permanent Mortgage may be the right fit for you. With this complete “one time close” loan package you can even finance the land purchase before building your new home. If you already own the property a no-down-payment option lets you use the equity towards the equity in the entire transaction.

Here are some of the construction-to-permanent benefits:

  • One closing for the construction & permanent mortgage
  • Interest only payments during the construction phase
  • Convenient approval process and lower closing costs
  • A locked-in rate on both construction & permanent loan
  • No prepayment penalties and flexible funding options

How Can I secure a Construction-to-Permanent Mortgage?

The First Step should be to talk to a loan officer that has experience with construction loans.  The amount you may borrow will be an important part of your discussions with your builder in deciding a budget and what to include in your new home construction or renovation project. A preliminary discussion with a construction loan specialist will help you understand the loan structure & the overall process from application to when the construction is finished.

To get qualified for the financing, you will need to provide basic debt, income and asset information. Your construction lender will explain what documents will be needed.

To start the loan application you will need a signed construction or purchase contract with your builder. The contract will detail certain aspects that will impact your loan, such as contract amount, building specifications & plans, a break-down of construction costs, construction start all completion dates.

 How does a construction-to-permanent mortgage work?

 A Construction-to-Permanent loan involves only one application and one closing that covers the construction phase and the permanent mortgage.

  • The construction phase of the loan has interest-only payments. The bank will set up a disbursement schedule which are the payments made to your builder as the work gets completed.
  • An initial loan disbursement is made if you’re purchasing real estate property on which to build.
  • If you already have a loan on the property that you’re building on, the first disbursement of the construction loan will pay-off that loan before construction starts.
  • Conversion to a 30 year fixed-rate mortgage after the construction phase is complete.

 Selling my current home to finance my new construction

You may plan to use the proceeds from the sale of your current home to help finance the construction of your new home. Construction loans are structured to meet your specific needs. Your construction loan specialist can help you understand your best options.

Making the transition financially and physically into a new home can require some juggling. Most people will take one of two approaches when it comes to moving from their current house to their newly built home:

Wait to sell

You may want to wait to sell your current home until you can move into your new home. To do so, you’ll have to qualify for a new construction loan while still making payments on your existing home mortgage. Additional cash reserve requirements may also be needed. If you already own the property where you’re building, that can be used as equity for your new construction loan.

Sell now and rent

Selling your current home before construction begins and living in a rental or other housing alternative until your new home is ready is another option. This makes the equity in your current home available for immediate use for your new construction and you’ll only have the construction loan outstanding.

Talk to your lender early on about what choice is right for you.

How do I get ready for my mortgage application?

It’s a good idea to get your financial house in order before you apply for your mortgage. This can make the application process easier and help ensure that you qualify for the mortgage loan you want. If you’re planning a joint application, make sure you are both prepared.

Three to six months before your mortgage application:

  • Get Your Credit Report: Request a free copy of your credit report from all three major consumer reporting companies and read them carefully. Notify the companies of inaccuracies that may negatively affect your credit score.
  • Don’t make any major purchases: Hold off on making any big purchases, such as a car or furniture, until after your closing. Taking on significant new debt now can impact your mortgage loan decision and how much you can borrow.
  • Start saving your pay stubs and other documentation: Ask for a Document Checklist and talk through any details you may be unsure about with your construction loan specialist.

Building a new home or renovating an existing one is a complex process. A Construction to Permanent mortgage makes the financing simple. The borrower can focus on their project with peace of mind knowing both the construction financing and the permanent mortgage are approved, the rate is set and the details for financing each stage from start to finish has been worked out ahead of time.

ABOUT: Arthur Aranda has over 25 years of mortgage banking experience and enjoys working works with homeowners and builders on financing home construction and renovation projects. Aranda is also a Certified Financial Education Instructor and provides First Time Homebuyer Seminars.  For more information on construction loans or to schedule a FTHB seminar please call Arthur Aranda at 201-741-1537.