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Construction Loans Explained | Guiding You Forward - YouTube
Channel: Mountain America Credit Union
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- [Krystalina] Hey, everyone.
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Welcome to the Guiding You Forward podcast
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presented by Mountain
America Credit Union,
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where we talk about all
things financial related.
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And today we're talking
about construction loans.
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And thankfully, we have Kim with us.
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Hi, Kim.
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- [Kim] Hello.
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- [Krystalina] We are so excited
to have you with us today.
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Tell us Kim, what you
do for Mountain America.
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- [Kim] I am a mortgage sales
manager for Mountain America
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and manage loan officers
and loan coordinators.
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- [Krystalina] Perfect, so
basically what Kim just said
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is she knows everything we need to know
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about construction loans.
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- [Kim] It changes by the second.
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(both laugh)
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- [Krystalina] So, tell us
Kim, just right off the bat
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what on earth is a construction loan?
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- [Kim] Okay, so if a
member reaches out to us
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and they inquire about
building a new home,
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then we start to talk to them,
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Are you in the need of
a construction loan?
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Or will you be getting the loan
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at the end when the home is done?
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- [Krystalina] Okay.
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- [Kim] Quite often, borrowers are finding
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that they need the
money to be dispersed to
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the builder, to the
supplier, subcontractors...
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- [Krystalina] Right.
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- [Kim] throughout the construction period
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and that's why they have us get involved.
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And we have a program, it's
called a one-time close.
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- [Krystalina] Okay.
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- [Kim] So they don't have
to pay closing costs twice.
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They pay closing costs one time
on their construction loan.
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And then that loan, once
the house is finished,
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it rolls to a permanent mortgage.
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- [Krystalina] Awesome.
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- [Kim] Yeah, if they're
getting a 30-year fixed,
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that's what it turns into
once the house is complete.
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- [Krystalina] Okay,
so I don't have to have
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a construction loan that's
separate from my mortgage.
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- [Kim] That's right.
- [Krystalina] Okay, good.
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Cause yeah, separate fees,
none of us want that, right?
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- [Kim] Right
- [Krystalina] Okay, awesome.
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So when it comes to a construction loan,
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obviously we're talking about
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the materials needed to build the home.
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Right? Concrete, lumber...
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I mean, I wish I knew all
the different varieties
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but what about the land that it's on?
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- [Kim] Okay, good question.
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So some members contact us and
they already have the land.
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So if they already own the land,
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we're going to get an
appraisal done on the land
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and then the cost to build,
to see what the value
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of the land is, and that's their equity.
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So that could be their down payment
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depending on what the
value of the land is.
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- [Krystalina] Okay, awesome.
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- [Kim] If they don't
already own the land,
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they can either find
land with their builder.
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Perhaps the builder
already has land picked out
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or our member would pick out land
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and then select a builder as
well for the construction.
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- [Krystalina] Okay, and
then is there an appraisal
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needed on that too?
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- [Kim] Yes.
- [Krystalina] Okay.
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- [Kim] So, we have rising
construction costs, right?
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So the cost to build, when
we look at the cost breakdown
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with all of the different line items
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and when we're looking at
that cost breakdown, okay,
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we're just making sure
everything is included,
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labor, materials.
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So we take the cost
breakdown, plus the lot, okay,
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to come up with a total purchase price.
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So let's say the cost
breakdown was $400,000
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and then the land is valued at a $100,000.
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So you have a total of $500,000.
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So we order an appraisal
and we provide the plans,
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the cost breakdown, the lot
information to the appraiser,
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the appraisal management company.
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And then they look for
comparables in the neighborhood to
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make sure that that house
is worth the $500,000
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that we have estimated.
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- [Krystalina] Okay, awesome.
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So that's how that process works?
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- [Kim] Right.
- [Krystalina] That's perfect.
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So similar to getting an appraisal
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on your existing property,
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- [Kim] Exactly.
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- [Krystalina] Where
they're going through and
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looking at those comps in your area.
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Okay, very, very cool.
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So when it comes to
utilizing or building my home
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do I have to use a general contractor?
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Can I be my own contractor?
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What does that look like?
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- [Kim] We do allow owner-builders.
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So yes, you can be your own contractor.
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- [Krystalina] Okay, interesting.
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Are there any other requirements
if I'm my own contractor
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that way that I need to be aware of?
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- [Kim] Yes, you will have to get bids.
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So we'll need to confirm
exactly what the costs are
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associated with the cost of the home.
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And we require 10% down
on an owner-builder.
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- [Krystalina] Okay, and
is it different if I have
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a general contractor?
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- [Kim] Yes, that's 5% down.
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- [Krystalina] That is the 5%, okay.
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- [Kim] If you have a
700 credit score, so.
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- [Krystalina] Okay, so
there's even more requirements.
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So, as far as those requirements go,
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you mentioned credit score.
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What are we looking at in that?
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As far as requirements besides that?
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- [Kim] Okay.
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So again, contractor, 5% down
requires a 700 credit score,
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10% down requires a 660 credit score.
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And so if you have three credit scores,
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that's your middle credit
score we're going by.
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- [Krystalina] Okay, what do you mean
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by three credit scores?
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What are you talking about?
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- [Kim] So we order your credit report
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that brings back three credit scores
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from TransUnion, Equifax and Experian.
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- [Krystalina] Okay.
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- [Kim] So if your credit scores
were 790, an 800 and an 810
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we're going to go with
the middle, which would be
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your 800 credit score
for qualifying purposes.
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- [Krystalina] Okay, all right.
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So we're gonna use that middle score
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and it just needs to be
at that certain threshold.
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- [Kim] Yes.
- [Krystalina] Okay.
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Interesting, interesting.
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- [Kim] And the loan officer
can help educate borrowers
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on how to increase their credit score.
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- [Krystalina] Okay, perfect.
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So if my score is lower than
I, than I'm wanting it to be
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and I don't qualify, there's
options for me still.
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- [Kim] We can certainly
look at them, yes.
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- [Krystalina] Okay, awesome.
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So, let's say that I've
got my construction loan,
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are those payments being
made to the builder?
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Am I making them?
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How does this all work?
- [Kim] Okay.
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- [Krystalina] This is so confusing.
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- [Kim] Let's use that example of
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a total purchase price of
$500,000, a land of $100,000.
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- [Krystalina] Okay.
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- [Kim] So a total of $500,000.
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If the borrower's going to
put 5% down, that's $25,000.
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So, if Mountain America
does a loan for $475,000,
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we have to pay that land to the seller.
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The cost of the land to
the seller at closing.
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- [Krystalina] Okay.
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- [Kim] So we've now dispersed a $100,000
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of your $475,000 construction loan.
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- [Krystalina] Okay.
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- [Kim] So you start paying interest
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on that $100,000 immediately.
- [Krystalina] Okay.
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- [Kim] So at closing, you will get a bill
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on the 15th of the following month
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for the interest on the $100,000 only.
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- [Krystalina] Okay.
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- [Kim] Now as construction continues,
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whether you're on a 12-month
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or an 18-month construction loan,
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it's going to depend on
how much we're paying
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out each month to the subs and suppliers
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and based on how much work is done.
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That's going to go up each month.
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So where it starts out on $100,000,
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by the time you're in month 11,
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we may have the full $470,000 dispersed
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- [Krystalina] Oh, okay.
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- [Kim] and you're paying interest on that
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full amount by then.
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- [Krystalina] Okay, interesting.
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So as that construction process goes,
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my payment is increasing.
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- [Kim] That's correct.
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- [Krystalina] Okay, well,
Kim, thank you so much
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for all of the information
on construction loans.
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- [Kim] You are welcome.
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- [Krystalina] Yeah,
we sure appreciate you.
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And thanks to all of you for tuning in
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and be sure to like and subscribe
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so that we can see you
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on the next episode of
Guiding You Forward.
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