Frequently Asked Questions
Over the years we’ve developed a list of frequently asked questions when it comes to construction loans. We recommend referring back to this list periodically as it can often help answer question you may not realize you had.
A “single close” construction loan is also your permanent financing. We typically qualify all construction loans on a either a fixed rate (15 or 30 years). We require as little as 5% down and one closing means just one set of closing costs
No. We will pay off your existing land contract or lender.
Absolutely not! That’s the beauty of our Construction-to-Permanent Loan. Your loan documents were created specifically to cover both the constructing and permanent phases of your loan. You can be assured that you have permanent financing when your home is completed.
Generally, you will almost always be able to borrow a percentage of the future value of the house, regardless of how long you’ve owned the lot or the total cost of the build.
Well, there obviously is no building to go by. However there is a plot of land and specific building plans for your new home. There are also recent sales of similar properties in the area that the appraiser uses to appraise the completed project.
Yes. In these cases the amount which can be borrowed is usually based on the future value of the house after the construction. Exceptions to this would be if the Borrower had less than 20% “in the deal” based on total costs, or the loan balance would be more than the site value (after the old house was torn down) in a “teardown” situation. This type of construction loan can be a refinance on the home in which you live, or an acquisition loan to acquire a property which will be remodeled to be used as your residence.
Yes, as long as they have a Contractor’s license within the state you are building in and you are comfortable with them. A general rule of thumb is that the builder should have done a minimum of two construction jobs within the last two years on the scale of the proposed build.
Being an Owner/Contractor is available only to someone who is themselves a builder/remodeler. The construction lender’s worst nightmare is a “for sale” sign popping up midway through the build.
The Construction loans typically have a 9-12 month term which begins on the date the borrower signs loan documents. If the home is not completed by the time the term expires we will extend your construction term with the possibility of a small cost to you.
During the course of construction, interest is paid only on the principal amount disbursed on the loan.
Interest is charged on disbursed balances, not the whole loan amount. Borrowers are billed every month the interest due on the loans. These statements are generated on the 21st of each month and are due 1st of the next month. Draws will not be released on loans with a past due balance.
Most Appraisers do a very good job of coming up with a fair value. In the event that the home appraises for less than cost, the amount over the appraised value would need to be paid by the customer or we can appeal the appraisal with additional comparable sales that they have missed…
Not necessarily. Consult with us first, and we will be able to determine whether you qualify, and for which loan program. If you are already renting, your rent will not be considered by the underwriter. If you need the proceeds from the sale of your current house to close escrow on the construction loan, you’ll have to sell your current residence prior to, or simultaneously with, the funding of the construction loan.
Cost over-run is a legitimate concern, whether caused by unforeseen circumstances or extras added later in the projects. We recommend having an allowance for extras added in for this very reason.
Homeowners normally obtain Hazard Insurance (required by Lenders). In the case of a construction loan, an additional insurance policy is required. This policy is often referred to as Builders Risk Insurance or a Homeowner’s Insurance Policy with Dwelling under Construction coverage. Builder’s Risk Insurance, is sometimes paid by the general Contractor, but needs to be stated in the contract negotiated.
A draw is a request to have funds disbursed from your construction loan. Your disbursements are intended to cover specific expenses incurred during your home’s construction. Sworn statements & lien wavers / or receipts must be submitted to the title company and the bank’s construction department. They use these as a basis for processing your request.
Yes, we will allow up to 20% to be taken (minus any deposits you have already made) to cover soft costs (plans, permit fee, tap in fees, etc.) after that we only reimburse for items and work already completed based on the percentage of work completed. Under special circumstances, exceptions can be made and have to be approved by our construction lending department.
Disbursements on a construction loan are designed to reimburse the Builder/Contractor as the construction of the home progresses. We will disburse construction proceeds based on the amount of the work that has been completed on the project. For example, the budget is $100,000 and the project is 10% complete (based on the inspector’s view); Dart Bank’s Construction Lending Department will disburse up to $10,000 on the project. This disbursement would be in addition to any advances or deposits the borrower may be entitled to receive. Disbursements for soft or direct cost expenses must be verified by an inspection.
Each construction project is assigned to a construction draw administrator whose contact information may be found in your welcome package. The Builder/Contractor will receive a Welcome Packet with important information about the construction draw process and how to contact us.
We can disburse 20% of the funds allocated for the Manufactured or modular home as a deposit. The remaining 80% of the funds designated for this kit or modular package are disbursed when the house or materials are delivered to the site or set onto the foundation. This holds as a guide and can be modified in certain situations with prior approval by the construction department manager.
We allow the Builder/Contractor to request 6 draws. The costs associated with the draws will be paid at the time of closing. Additional draws are available but may incur additional draw inspection fees.
Draw funds are typically disbursed to the title company for disbursement directly to subcontractors. Disbursement options will depend upon what the draw/advance is for at the time of request.
When we receive the borrower’s Draw Request in the Construction Department, we immediately order an inspection to verify the status of construction on the Borrower’s home. The inspection is performed within 2 to 3 business days from the time we receive the Draw Request. When the inspector verifies the percentage of completion and we receive verification from the title company that the property is free of any mechanics liens, the Draw Request will be funded.
Your builder will request your final Draw Request once your home is considered to be 100% complete. The Builder will then request your remaining loan funds (if additional funds remain), and “Convert” your loan into the permanent loan phase, provided that the conditions outlined in your Construction Loan Agreement are met. When requesting your final Draw, the following items must be submitted:
- Final Draw Request
- Affidavit from builder stating all material providers and subcontractors have been paid in full.
- Unconditional Lien Waiver upon final payment signed by the General Contractor/Builder
- Copy of recorded Notice of Commencement (if applicable) and a Certificate of Occupancy.
- Evidence of current homeowner’s insurance
- Final Progress Inspection
- Borrower’s mailing address and email address for future correspondence
- In addition; the loan must be in good standing according to the terms of the Construction Loan Agreement.
Once the final Draw request has been funded, the construction loan will be Converted into a permanent loan.
When this occurs our Draw Administrator will reach out to both you and I to let us know the loan has been fully funded and ready to convert. I will then reach out to you to let you know what information will be needed and we may need to update some asset and income information.
Yes you can. A common occurrence is that the Borrowers have now sold their previous residence, and they wish to use some of these funds to buy down the construction loan prior to the note being modified to longer term fixed rates.
This FAQ is for informational purposes only and you will need to refer to your Construction loan agreement at closing for additional information.