Considering home construction? Advice from construction loan experts!

Building a new home, whether using a contractor or doing the work yourself, is an exciting but potentially complex journey. Many prospective customers are not sure where to start or which questions to ask. We have compiled a list of the most frequently-asked questions, as well as helpful related resources and documents, to help make your journey to dream home construction a little easier!

 

When considering a construction project requiring a loan, where do I start?

Do I need to sell my current home prior, or can I wait to sell after construction is completed?

What are typical costs to build?

Can I do a land purchase and a construction loan in one?

Do you require a licensed builder, or can we do the build ourselves?

How much of a down payment do you require?

What are draws and how do I receive draws?

What if I do not use all of my construction loan funds?

Are there closing costs when construction is completed?

What kind of interest rate applies to a construction loan?

What is the difference between fixed interest rate and variable interest rate options?

Will I qualify for a construction loan?

Do you have a printable document about the GreenStone construction loan process?

Can you tell me more about GreenStone?

 

When considering a construction project requiring a loan, where do I start?

A:  Whether you already have your land or still need to find it, start by getting pre-qualified to assess your borrowing ability. By pre-qualifying, we can help you determine a budget to guide decisions, such as setting a land purchase budget if you haven’t secured your spot, whether or not you want to sell an existing home before starting the construction project, and determining a construction budget to direct your blueprint designs and home decisions. Planning for construction can be a lengthy and costly process; it is best to see what you can afford before getting in too deep.

 

Do I need to sell my current home prior, or can I wait to sell after construction is completed?

A:  This question is a great example of the importance of getting pre-qualified early in your home building process. If you can qualify for a loan supporting two mortgages at once, then you may choose to keep your current home until you are ready to move in to your new home. If you are not eligible with both mortgages, you may need to find an alternative living space while you build in order to sell your current home prior to the loan closing. Depending on your financial situation, the down payment requirements on the new loan may also necessitate selling your current home before closing on the new loan.

 

What are typical costs to build?

A:  In general, the cost per square foot is a good tool to assess the overall cost of the project. We recommend you take the time to ask this question of the builders you are considering, as it may range by builder. We’ve seen typical costs range from $140 - $170 per square foot. Also remember home projects often run over budget, therefore a 10% overrun is required as part of the loan; those costs are tracked as the last line item of your sworn statement.

 

Can I do a land purchase and a construction loan in one?

A:  We can tailor a solution for you. The land and construction costs can be done at the same time in one loan, or we can facilitate them separately.  The best option for you will depend on your timing. If you have floorplans ready and can get your sworn statement (document that shows all costs of the build) completed quickly, you may be able to do both transactions in one loan closing. If it may take you some time to get the construction documents ready, or if the seller of the land will not wait, then you may want to secure the land purchase first and roll the construction loan in later.

 

Do you require a licensed builder, or can we do the build ourselves?

A:  GreenStone’s loan options allow you to choose what’s best for you! You can use a licensed builder, do-it-yourself, or opt for a combination of both. Either way, builders’ risk insurance will be required, and the costs budgeted for the project need to be adequate.

 

How much of a down payment do you require?

A:  We can lend up to 80% of the as-will-be value, or up to 95% of value with Private Mortgage Insurance (PMI) approval. The appraised value is determined before closing based on the home plans and the land; the planned home will be valued as if the home were already built. At closing, we will need to collect the entire construction cost, land payoff (if any), and closing costs. The amount the loan does not cover will be your down payment, which you will need to bring to closing. The down payment will vary based on numerous factors. For example, the more equity you have in the land, the lower your down payment may be. The lower the home appraisal value in relation to its build cost, the higher your down payment may be.

 

What are draws and how do I receive draws?

A:  Draws are used to receive funds to pay your vendors and contractors throughout the home construction. We will provide you a GreenStone construction specialist to assist you during the draw process. All draws will be submitted to the title company, and once approved, the funds will be disbursed to the relevant party, which may be a contractor, sub-contractor, supplier or yourself. You will work with the title company to decide whether funds are disbursed via check or direct deposit, depending on draw purpose and title company's available disbursement options. If documents are completed correctly, it generally takes 1-5 business days to receive a draw.

 

What if I do not use all of my construction loan funds?

A:  You have a few options if you have leftover funds after construction completion:

• Apply the remaining funds back to your loan principal and request re-amortization.
• Use funds to increase your cash savings (approval required).
• Put the funds toward additional improvements to the house or property, such as landscaping, a deck or patio, etc.

 

Are there closing costs when construction is completed?

A:  This is a one-time close construction loan, therefore you will not have to close on the loan again or refinance after the build. All construction related fees are part of the closing costs you pay during the initial closing.

 

What kind of interest rate applies to a construction loan?

A:  Your rate will vary depending on the current prime interest rates and your credit score. For a range of interest rates, contact a GreenStone lender near you.

 

What is the difference between fixed interest rate and variable interest rate options?

A:  Variable Rate Option:

• Your loan interest rate varies during the home construction project as interest rates change. Once construction is finished, your loan will convert to a fixed rate mortgage. This conversion does not require a refinance nor a second closing
• During the construction period, you will make interest-only payments on what has been disbursed at the time of the billing
• You will have 12 months to complete construction before principal and interest payments start, and a rate conversion is required.

    Fixed Rate Option:

• Your loan will be locked into a fixed interest rate during the construction period; that rate remains fixed at the same rate for the life of the loan
• During the construction period, you will make interest-only payments on what has been disbursed at the time of the billing
• You will have 6-12 months, depending on your loan product, to complete construction before principal and interest payments start. An extension can be requested if construction is not complete within allotted time frame. With the extension request, a 0.25% fee may apply.

 

Will I qualify for a construction loan?

A:  GreenStone's financing options follow general credit standards. Each applicant's situation and credit history is unique and each application is considered on a case-by-case basis. Some exceptions do apply, and we encourage you to discuss your situation with a GreenStone financial services officer.

• Minimum credit bureau score of 680
• No late payments in the last two years on installment debt such as auto loans, or in past year on revolving debt such as credit cards
• Total monthly debt to income ratio not more than 40% of gross income
• Bankruptcies, foreclosures, short sales, charge-offs or similar situations within past four to seven years will be evaluated on a case-by-case basis 

 

Can you tell me more about GreenStone?

A:  GreenStone is a cooperative and because we are owned by the members we serve, many members view our association more like a credit union than a commercial bank. We do not re-sell your mortgage to another lender. It will remain with GreenStone and will never be sold to Freddie or Fannie.

GreenStone members need to purchase association stock in the amount of 2% of the mortgage or $1,000, whichever is less. This is at-risk stock, however, in our 100+ years, we have always refunded the stock amount when the loan is paid in full. The stock will not increase or decrease in value.

Another benefit of being a GreenStone member is our Patronage program. As a cooperative owned by the members we serve, we give back nearly half of our annual earnings each year to our member-owners in the form of patronage. This patronage program makes us unique in the financial services industry, as an organization competitive in up-front interest rates, and also giving back a portion of its earnings to customers. In 16 years of our patronage program, we’ve returned a total of $605 million to members via checks received each March.