The first step toward building a home in the country is purchasing land to build on. For some, construction begins immediately, for others life circumstances or finances could require purchasing land first and building down the road. When the time comes to build your dream home, here are some key things to consider when preparing for a home construction loan.
Start with pre-qualification
Starting with pre-qualification is always a good idea. Getting pre-qualified for a home construction loan provides financial clarity. It can be easy to lose sight of reality when planning a home. Pre-qualification provides you with an amount you are approved to borrow, informing your decisions whether you choose to work with a general contractor or manage construction yourself.
Pre-qualification also provides flexibility. Much like getting pre-qualified for a home loan for an existing home, getting pre-qualified for a home construction loan provides the ability to make decisions and move the project along more quickly. If for some reason you decide to delay your home build, you are prepared when the time comes.
Evaluate the site
Whether you purchased land in the past with the intention of building a home on the site in the future or would like to build on a property not originally intended for building, the same checklist applies.
Before starting construction, you will need to check local zoning and code requirements. Municipal rules differ widely across Michigan and Wisconsin. Every township is different, so it’s best to reach out to your township on these legal questions as soon as possible. Maybe you would like to build a barndominum on your property, only to find out your township doesn’t allow barndominums. Or maybe the dream home you are planning doesn’t meet your township’s square-foot requirements. The best way to avoid frustration is to make sure that you know your local requirements early in the process.
In most cases, a percolation (perc) test is required before building a home on a piece of land to ensure a septic system can be installed on the property. If electric and other utilities are not already accessible, it is crucial to establish a plan for getting them set up. These utilities can come at a substantial expense that can impact the budget of your construction project and its timeline.
Another consideration that can easily be overlooked is legal access. GreenStone encourages getting a survey of the property you intend to build your home on to ensure there are no surprises when it comes to property boundaries or access.
Leverage your land
GreenStone gives you options when transitioning from owning land to building a home on your land. If your land loan is with GreenStone, you can choose to keep your existing loan and take out a second loan for home construction. This option might make sense if you bought your property when interest rates were lower, allowing you to maintain a lower rate by keeping the two separate. However, you also have the option to roll your land loan into your construction loan, simplifying your payments.
Depending on the amount of equity you have in the land that you intend to build your home on, you may have the option to use the equity you have in your land towards a down payment on your construction loan. This can be a great option if you have built enough equity to satisfy the down payment requirements for the new loan.
Consider your construction approach
Unlike most lenders, GreenStone gives you options when it comes to how you want to manage the process of building your home. For those that choose to go the traditional route of working with a builder, GreenStone does not require you to only work with certain builders like many other lenders, giving you freedom to find the best builder for your project.
GreenStone also gives you the option to manage your home construction project yourself (do it yourself, or DIY), where you act as your own general contractor. Whether you have a construction background or simply want to be as hands on as possible, this is a great option for some. GreenStone is one of the only lenders that offers a DIY option.
A third option is to do a DIY loan but still work with a contractor for some aspects of the build.
This hybrid approach allows you to be hands on while still outsourcing certain aspects of the project as needed.
One thing to note is even if you choose the DIY option, you are still required to get third-party bids to ensure estimates for the project are accurate and competitive.
Budget wisely
Whether you choose to work with a builder, or go DIY, having a solid budget that entails all the various costs associated with your home construction project is very important. A good budget ensures you are working within the available funds you have for your project.
Construction costs fluctuate often based on the economy and other factors. GreenStone requires a 10% cost overrun fund for most projects to protect the borrower and ensure the project can be completed. If unused, the overrun can be reapplied to the loan balance, reducing monthly payments.
Know what to expect during construction
Once construction begins, borrowers enter a nine-to 12-month interest-only phase. This delays the need to pay principal on your loan until construction is completed.
Once the home is complete, the loan automatically converts to a traditional principal-and-interest mortgage—no refinancing required. If delays occur, GreenStone can extend the timeline for an additional fee, and we regularly work with customers to keep their projects moving.
One advantage of working with GreenStone is that throughout the construction process you’ll work with a dedicated construction disbursement specialist who handles draw requests, documentation, and coordination.
Start early and ask a lot of questions
When preparing for a construction loan, doing your due diligence at the beginning pays big dividends.
GreenStone’s team of experts is here to help by answering any questions you have and walking you through the construction loan process every step of the way. By pairing due diligence with GreenStone’s customized financing options and commitment to customer service, you can build your dream home with confidence.
