How to finance building your retirement dream home | Sun Life

How to Finance Building a new home?

Build Custom Home / June 6, 2022

What is the approval process like for construction-to-permanent loans?

The approval process for construction loans is similar to that of a typical mortgage. Underwriting still reviews your income, assets, liabilities, credit history and appraisal before granting approval. The main distinction is that the amount you can borrow will also be based on the improved value of the property after renovation or construction.

How long does the approval process take?

Prepare for the home construction loan mortgage process to take a few weeks longer than a standard mortgage approval (7-10 days) might, due to the plans, specs and contracts that must be reviewed before it can be approved. Getting pre-approved can help accelerate the process and determine how much home you can afford. Be sure to factor the cost of the land into the estimate if you will need financing for the lot as well.

What do I need to apply?

As you prepare to submit your construction loan application, be sure to have the following documents and information on hand:

  • A copy of the deed to the land, whether you own it or are purchasing it
  • HUD -1 Settlement Statement for the purchase of the land if you purchased it within 12 months of applying for the loan
  • Contract for the purchase of the land if you don't own it already
  • Contract with a builder
  • Complete builder information: Company name, address, phone number and federal tax ID number
  • Plans and specifications for the home
  • Certificate of liability insurance for the builder
  • Builder's risk/homeowner's policy
  • Building permit - only required if builder wants disbursements at closing (no more than 10%)

What do I need to know about the processing phase of my loan approval?

After you submit your application you will receive specific disclosures to guide you through the processing of your loan. These documents will explain disbursements to builders as well as the documentation you need to submit. Inform your lender if you need to make any changes to the contract with your builder. Try to have the application and other documents to your lender at least 48 hours before closing to provide ample time to meet the needs of this niche product.

Will I have one or two closings if I'm purchasing land and financing construction?

You only face one closing with a construction-to-permanent loan.

What fees will I face when closing the loan?

The closing process for home construction loans is similar to any other mortgage closing, but there are some fees you will only see on construction home loans.

  • Fees for inspections, which are required before disbursements can be made during the construction process. (Any additional inspection fees will be collected as they are incurred.)
  • Fees paid to the title insurance company for title updates. (Some states require these at the time of disbursements.)

What mortgage payments do I make during construction?

During construction you will be responsible for interest-only monthly payments on funds that have already been disbursed. You may also see fees or late charges on your bill, but you will not be billed for taxes or insurance during construction. You are also not required to make payments toward the principal of your loan during construction.

How do disbursements work?

Instead of paying for the construction of your home upfront, loans are disbursed at an average of five predetermined stages during the building process. Your contract with the builder should outline how many disbursements you'll have and when they will be made. Disbursements to subcontractors are signed by both the borrower and builder. If the disbursement is going to the builder, you will need to provide verbal confirmation before the disbursement can be allocated.

If necessary, a title inspection and title update may accompany a disbursement request. After a request is made, funds are generally disbursed within seven business days of the request and 24 hours of the receipt of the inspection and title update. Disbursement amounts vary based on the percentage of work completed. Talk to your builder and lender to work out a system of disbursements that works for you.

What do I need to convert my construction loan into a permanent loan?

After construction is completed, you will need certain information to convert your construction loan to a permanent loan. Check with your lender to determine what information you need specific to your situation, but the following items are generally needed:

  • 100% complete inspection report from the inspection company
  • Final title update ordered from the title insurance company
  • Certificate of Occupancy from the builder
  • Completion and acceptance letter- signed by the borrower and builder to verify that construction is complete. May exclude landscaping additions that are weather dependent
  • Final lien waiver or affidavit signed by builder
  • Homeowner's insurance policy with the first year's premium paid in advance