Construction Loans

What is a Construction Loan?

Construction lending is a two-step loan process that homebuyers use to fund the construction of your new, custom home. The first loan is a short-term loan used to construct the dwelling and pay off the land, while the second loan is the long-term financing (like any other mortgage on a home) for the property.

Steps to Getting a Construction Loan

Step 1: Get Pre-Approved with JVM Lending

You will need to get pre-approved for the long-term financing ahead of time to ensure that you will qualify when the time comes to obtain this loan!

Step 2: Secure a Lot

You can purchase this ahead of time or finance it into the loan.

Step 3: Choose a Builder

Once you have selected a builder, we will submit them for approval.

Step 4: Appraisal

The next step is to have an appraisal completed using the site plot plans, building plans, and cost breakdowns.

Step 5: Construction Loan Approval

Once all the plans are approved, you will obtain the 12-month construction loan, and…

Step 6: Construction Begins!

Step 7: Secure Permanent Long-Term Financing

When we are within 45 days of construction completion on your home, we will submit updated financial documents to underwriting for your permanent long-term financing, and order an appraisal.

Step 8: Final Loan Approval

Once we have final loan approval, you will obtain the permanent long-term loan, and the home is officially yours!

Pros & Cons of Construction Loans

Pros

Build a Custom Home

A construction loan will allow you to build your perfect home that checks all the boxes – no need to settle on something that isn’t exactly what you want!

Avoid Bidding Wars

With construction financing, you can avoid bidding wars in hot markets. Competition for plots of land is not nearly as intense, and if you already own the land, there’s no competition at all when it comes to building your dream home!

Lower Maintenance

Newer homes are built with the most updated technology and will follow current building codes. This should mean lower maintenance costs for you in the first few years!

Cons

Long Process

Construction loans are an inherently lengthy process since you will be constructing a home from the ground up. If you’re on a tight timeline or looking to move quickly, a construction loan might not be the best fit for you.

Location

Plots of land are often hard to find in more urban locations. If you don’t already own a plot of land, it may be tricky to find available space in the area you’re hoping to live.

Noise/Other Construction

If you’re building a new home, there’s a chance other homes are being built on the surrounding land. You may need to put up with construction noise from other homes being built in the surrounding area.

Construction Loan Requirements

JVM Lending currently only offer construction lending on single-family homes utilizing Conventional, FHA, and VA financing. Please check out our other loan types for more information on each loan product.

For construction loans, you must have:

• Minimum credit score of 680
• Minimum down payment of 10%
• 45% maximum debt-to-income ratio
• Three months of reserves

Tips for Finding a Builder

Each builder has a unique style, which is why shopping around for the perfect builder is always encouraged. Some websites (like Houzz) let you explore and research home builders in your area.

Once you are pre-approved and have your budget in mind, we suggest touring homes by each builder you are considering. Always have a list of questions ready and your phone handy to take some pictures!

Once you find your builder – please let us know! We will need to approve the builder and order an appraisal to confirm the feasibility and timeline of your construction loan.

Interest Rates for Construction Loans

Construction lending consists of two loans: 1) your construction loan and 2) your permanent loan. Each loan will have a different interest rate.

The construction loan is a 12-month, interest-only loan and the interest rate will be slightly higher as there is more risk involved in this type of financing. During the construction phase, you will have the option of locking in your rate for your permanent loan with one allowed rate “float-down.”

This means you can lock in your rate anytime, and if interest rates decline during the construction process, you are more than welcome to re-lock with the lower rate!

The Final Step

Once your home’s construction is 45 to 60 days from completion, we will send out an appraisal for one final review of your home. This appraisal will also determine the final valuation of your home.

At this time, you will begin sending in updated documents to close the permanent long-term financing. Once all documents are signed and the appraisal is returned, you are ready to move in!

Is a Construction Loan Right for You?

The best way to determine whether a construction loan makes the most sense for you and your situation is to talk to one of our mortgage experts at JVM Lending. Our experts can walk you through monthly payment scenarios, give you current interest rates, and discuss any other questions or concerns you might have.