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Fundamentals Graduate Study Mortgage 101 Investments 101 |
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Under the second option, you must purchase the land "free and
clear". Most lenders will then provide up to 80 percent financing of total land
and building costs and require a "first lien" mortgage. Therefore, 20 percent
land
"equity" is usually required of the buyer. Construction funds are disbursed in stages. The lender will require periodic inspections and disburse funds based upon the percentage of satisfactory completion. The buyer pays only interest (usually monthly and at a variable rate) just for the amount of loan funds disbursed to that point. You should discuss the bank's disbursement schedule with the building contractor to ensure that the amounts and percentages released (based on completed work) meet his/her cash flow needs. Some suppliers will require payment for materials and goods in advance therefore, the buyer should have some funds of their own available. When the home is complete and an occupancy permit is issued by the municipality, the lender will request a final inspection. The buyer may then convert to a conventional, fully-amortizing mortgage. This conversion can be automatic based upon options previously selected by the buyer when he/she initially applied for the construction loan. Useful questions to ask the contractor when deciding which construction or reconstruction financing is right for you: [1] Will the loan automatically convert to a permanent mortgage after the construction phase? [2] Does the lender require a standard disbursement schedule? [3] How much of the total cost (land plus construction) will the lender fund? [4] Will the lender release a portion of the land purchase price at closing? [5] What is the total appraisal cost including progress inspection fees? [6] Are there any conversion fees?
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