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A Consumer’s Guide to Construction Financing
Building Your
Dream Home
How you finance the construction of your new home is one of
the most important things to consider. Emerald City Lending
Group, LLC can help. We’re a local leader in home
construction lending. We’re known for fast approvals,
exceptional customer service and a construction loan that
takes you from groundbreaking, to home ownership in one easy
process.
At Emerald City Lending Group, LLC your Loan Officer can
answer any questions you or your contractor may have, so
your project keeps moving smoothly, and there are no
surprises along the way.
Table of Contents
2 What home construction loan products does ECLG offer?
3 How does the construction loan process work?
4 What makes up the construction project costs?
6 What insurance is required with a construction loan?
7 How does the construction process work?
8 The Construction Time Line.
8 After loan closing how does disbursement work?
9 Your Home Construction Service Center Team.
This publication is designed to provide general information,
not legal or technical advice. If legal advice or other
expert advice is required, the services of a professional
should be sought. Any loan terms referenced in this
publication are subject to change without notice.
Construction-to-Permanent Loan Our Construction-to-Permanent
Loan is a one-time close loan designed to build or
rehabilitate a primary residence or second home and obtain
permanent financing. Onetime close means one loan – start to
finish. You sign one set of loan documents that covers both
the interim construction phase and the permanent loan phase.
This eliminates the need for multiple loans to get you into
your new home. With this single loan, you can purchase the
land for your home and complete the construction. When the
construction has been completed, the loan converts to a
permanent mortgage loan without another application or
additional closing fees. You may choose from several loan
products
(fixed and adjustable rate mortgage (ARM)) and rate lock
options that offer a variety of features. The construction
period may vary in length from 6 to 18 months.
Bridge Loan
Want to use the equity in your existing home as the down
payment on your Constructionto-Permanent Loan? Our Bridge
Loan program allows you to take advantage of the equity in
your current owner occupied residence (which will be sold)
to use for the down payment requirements on a
Construction-to-
Permanent Loan. Lot Loan This is the perfect loan program to
finance the purchase of a residential lot for future
construction of your dream home. The convenient balloon
maturity option allows you two or five years to design your
home and choose a building professional. Programs include a
fixed-rate 30-year mortgage with a 2-year balloon, and a
30-year adjustable-rate mortgage
with a 5-year balloon. Interest only options for both
programs are available. Best of all, you can choose the
ECLG Construction-to-Permanent Loan when you’re
ready to build.
Remodel loan
Want to make major improvements to your existing home? Need
a new kitchen, bigger bathroom or family room addition? This
unique second mortgage calculates the loan amount by using
the future value of the planned structural improvements. And
we give you immediate access to the construction funds at
loan closing. This program allows the flexibility of a
30-year mortgage with a 15-year balloon or a fully
amortizing 15-year mortgage.
What home construction loan
products does ECLG offer?
Home Equity Line of Credit (HELOC) With a
HELOC, you can leverage the equity in your current home
toward the down payment on a lot, add a new master suite or
family room, or replace appliances in your home. A HELOC
allows you the opportunity to borrow at very competitive
rates. 2 costs (lumber, bricks, mortar) and the soft costs
(permit fees, engineering fees, architectural fees).
Construction Contract.
This is the agreement between the building
professional and you that details the planned construction
project, the amount of time required to build the home, and
the agreed-upon cost. Your construction term should be at
least as long as your
construction contract. Description of Materials. This
information describes the materials to be used in the
construction of the home. For example,
wood shingle roof or lightweight tile; redwood siding or
cedar shingle.
Completed Construction Loan
Budget Worksheet.
This form is used by your Loan Officer to
bring all the costs together, along with all the items that
you have paid for in advance. By using this form, your Loan
Officer will be able to determine the maximum loan amount
and the amount
of equity or cash to close required by you. Your
Construction Loan Officer will complete your budget for you.
Builder Statement. This form ensures that the building
professional is experienced, has a proven track record and
will be capable of performing under the terms of the
contract. General Contractor License. A copy of the building
professional’s license (not required in all states) should
also be included with the Builder Statement.
How does the construction loan process work?
The Construction-to-Permanent Loan process is very similar
to the process of a
standard purchase or refinance transaction. But, unlike a
purchase transaction for an existing home, a
Construction-to-Permanent Loan involves determining the
value of a home that is not yet constructed. To assist the
appraiser and the lender in determining the future value of
the home, information must be provided on the planned
improvements, what materials will be used and the total
costs to complete the construction. Additionally, ECLG must
evaluate the building professional who will oversee the work
to ensure that he or she has the experience to complete the
proposed construction. For a Construction-to-Permanent Loan
a list of documentation to fit your specific needs will
be provided to you. However, the following
documentation is generally required (in addition
to standard credit documentation):
Final Plans and Specifications. These
consist of a legible set of architectural
drawings (building plans) prepared
by an architect and approved through
city or county planning. They typically
include a floor plan showing all dimensions,
a foundation plan showing all
dimensions, outside elevations of the
building, electrical and plumbing details,
as well as other details of the actual
planned construction.
Detailed Line Item Cost Breakdown.
This is generally prepared by the building
professional and should include the hard
What makes up the construction project costs?
Loan-to-Cost Example:
Land value/ house cost: $40,000
+ Total cost of construction: + $180,000
__________
$220,000
+ Total closing costs + $10,000
__________
$230,000
+ Interest Reserve + $6,291
__________
$236,291
+ Contingency Reserve + $9,000
__________
$245,291
× Maximum LTC (95%) × .95
__________
Loan Amount = $233,000
There are a number of costs that go into
building a new home. These costs make up
the items used to build your construction
loan budget.
Soft costs (off-site and indirect costs).
Permit fees, engineering fees, architectural
fees and other costs associated
with building the home but are not
directly a part of the actual construction
costs. Many times, you may have
already paid some of these costs up
front. If so, these paid items may be
considered as “equity”, if you can document
the cost with a bill and a canceled
check or a paid receipt.
Hard costs (lumber, bricks, mortar).
The actual cost of construction covering
all materials and labor associated
with the building of the home. Typically,
you will enter into a contract with a
building professional to build the property.
Like a purchase contract for an
existing home, this contract sets forth
the work to be done and the costs
associated with that work.
Closing Costs. These are costs associated
with the closing of the loan, such as title
costs, loan fees, discount fees, inspection
fees and appraisals.
Land value/house cost. If the property
was purchased within the past 12
months, the purchase price of the land
will be used in determining the site
value. If the property has been owned
for more than 12 months, the appraiser’s
estimate of the site value will be used.
A copy of the HUD-1 for the purchase of
the land must be provided if owned less
than 12 months.
Loan-to-Cost (LTC). The maximum loan
amount is based on total project costs,
and is determined by using the maximum
LTC. The following is an example
of the LTC calculation using the same
loan information in the Interest Reserve
Formula on the next page.
Contingency Reserve.
A lender required
reserve account to cover unforeseen
cost overruns in the construction of the
home. A required reserve equal to 5%
of the hard costs will be established in
a Contingency Account. (Your building
professional may hold a reserve other
than what ECLG requires.)
1 Your loan officer will build your costs and Interest
Reserve into your
construction loan budget. If these accounts run out, you
will be
responsible for all payments and overruns.
2 Interest reserve percentage subject to change without
notice. Loan to-
cost (LTC) at or below 95% use 60%. LTC greater than 90% use
75%.
Interest Reserve. An account is established
to pay the estimated1 interest
costs during the construction of the
home. This way you do not have to
make out-of-pocket payments during
construction. If the Interest Reserve is
depleted during construction, you will
have to make interest payments.
The formula for the interest
reserve estimate is provided in
the following example:
Interest Reserve = Monthly Estimated
Interest × Construction Term
Interest Reserve Formula2:
Loan Amount $233,000
× (60%) × .60
__________
$139,800
× (Interest Rate) x 6.0%
__________
= Annual interest $8,388
÷ (12) ÷ 12
__________
= Monthly Estimated Interest $699
× (Construction Term) × 9
__________
= Interest Reserve $6,291
•
The previous example provides for an
Interest Reserve account of $6,291 for a
loan amount of $233,000 with a construction
term of nine months.
Loan expense increases as your project completes.
The interest reserve calculation assumes
interest on the loan as it ramps up. Individual
projects may vary.
3. During the construction of your home, you
have additional risk. Therefore, insurance
requirements on a construction loan are more
complex than a standard loan.
What insurance is required with a construction loan?
Course of Construction Casualty Insurance
This policy is in the form of an “all risk” policy
with fire, extended coverage, builder’s risk,
replacement cost, vandalism and malicious
mischief insurance coverage. You should be
named as insured with the insurable value
equal to the replacement cost of the improvements
or the loan amount, whichever is lower. ECLG must be named as the loss payee
under the policy. Once the improvements are
completed and the permanent loan phase
begins, the course of construction policy is
usually converted to a standard “all risk” homeowner’s
policy. Contact your homeowner’s
insurance agent for additional information.
General Liability Insurance
This is a comprehensive general policy or included
as a broad form liability endorsement. You or
your building professional can provide this. If
you provide the insurance, a minimum amount
of $300,000 for each occurrence is required,
extended to both property and personal injury. If
your building professional is providing the insurance,
a comprehensive general policy of at least
$1,000,000, or a policy including a broad form
liability endorsement is required.
Workers’ Compensation Insurance
This insurance covers the building professional,
subcontractor or others who will be
working on the subject property. The building
professional typically provides this policy, thus
the building professional should be named as
the insured. In states where Workers’ Compensation
Insurance is not required or you are acting
as your own building professional, a waiver
is required. You will need to sign an acknowledgment
that you do not have the insurance or
that you will verify all subcontractors have the
appropriate coverage.
Flood Insurance
Flood insurance is mandatory on all loans
if any portion of the home lies in a specified
Flood Zone. We will provide you with
your Flood Zone during the loan application
process. If it is determined that your property
is located in a Flood Zone, contact
your homeowner’s insurance agent for the
appropriate coverage.
Remodel Loans
A standard homeowner’s policy that
includes Workers’ Compensation, General
Liability Insurance and Personal Liability
Insurance is required.
Lot Loans
Insurance is not required on lot loans. You
are encouraged to review your current homeowner’s
policy for liability coverage that can
be extended to cover the lot being purchased.
American Institute of Architects (AIA) is a
professional association of licensed architects,
with a strong commitment to educating and
serving the general public. AIA members in
your area may be found at www.aia.org.
National Association of Home Builders (NAHB)
is an association representing more than
205,000 residential home building and
remodeling industry members. Known as
“the voice of the housing industry”, NAHB is
an excellent source of information for consumers
interested in building a custom home.
Visit their website at www.nahb.org
American Society of Interior Designers (ASID)
is an association of interior designers and a
resource to you on how to find and choose a
designer in your area. ASID members in your
area may be found at www.asid.org
Construction Planning Resources
How does the construction process work?
Building your dream home begins several
months before you break ground. Understanding
each step of the process, from assembling
your dream home team to planning your
housewarming, and how long it may take, is
crucial to keeping things moving smoothly
without any surprises along the way.
It all begins with knowing your ABCs. You
need an Architect to design your home, a
Building Professional to construct it, and
a Construction lender to help finance it. You
may also want to use a realtor to find a
finished lot if you do not already have one.
You can assemble your team in any order
you choose. But keep in mind, that each
plays an integral role in the process and
will work together to help make your
vision a reality.
This Construction Time Line will help you
plan your project. It is based on a 12-month
construction phase. However, all projects
are not the same. Custom homes built from
the ground up, can take anywhere from 6
to 12 months or longer depending on the size
of the home. Larger projects may take
longer. Systems-built homes go up in as little
as three months. These “modular” or “panelized”
homes are custom homes whose major
components are constructed in sections in a
factory and assembled on your lot. Energy
efficient homes comprised of structural insulated
panels and insulated concrete forms also
utilize the systems-built technology.
Where to Build
Location is one of the most important factors
to consider. When selecting a geographic
location, you will want to consider lifestyle,
schools, proximity to work, and accessibility
to the beach, mountains or leisure activities.
There are realtors who specialize in finished
lots as well as individuals and companies that
sell individual finished lots. If you find your
lot, but you aren’t yet ready to build, you may
obtain a Lot Loan. This is short-term financing
for the purchase of a residential lot suited for
future construction.
Phase 1
Put your project on paper
Interview and find an architect.
Interview and find a builder, then
Secure financing.
Phase 2
Loan closing
groundbreaking
Foundation
Framing
Phase 3
Roofing
Rough Plumbing
HVAC
Electrical
Other mechanical work
Phase 4
Drywall and insulation
Flooring
Stairs
Cabinets
Painting of trim, walls, and ceilings
Final mechanical work
Phase 5
Final sanding and sealing of finished wood
Carpeting
Closet shelving
Phase 6
Final inspection
Final close
Releasing the contractor
Final draw request
Construction loan converts into
permanent loan
The Construction Time Line
After loan closing, how does disbursement work?
Closing Your Loan
The initial closing includes: the payoff of
the lot or existing mortgage (if applicable)
and related closing costs, less your required
equity. The initial closing will not exceed the
amount allocated in the Loan Budget Worksheet
for closing costs and/or lot payoff.
Any additional costs must be paid by you at
closing. You must have an adequate down
payment (equity) at the time of closing. Equity
is defined as cash paid towards the lot, construction
improvements (both hard and soft)
and cash paid at closing, if required. If you own
the lot free and clear, you cannot obtain “cash
back” that has been applied to the lot purchase.
Disbursements.
Disbursements are made on a reimbursement
basis. You or your building professional are
required to advance funds into the project.
Disbursements will occur over a period of time
based upon the percentage of work completed
on the home each month, as determined by ECLG.
Your Home Construction
Service Center Team
Peter Tetlow and Paul Whitacre,
Monday – Friday
8:30 AM – 5:00 PM PST
www.eclg.net
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