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Construction Loan Financing:
Here we go again. Every year, about this time, I am asked to remedy what should not
have happened in the first place. Young couples get caught up in what should be a
pleasant experience but ends up being, more times than not, an absolute nightmare: the
construction of their first home. Some are under the assumption that building one's house
is easy. Lenders, as a general rule, are not protected against liens until after the
house has been built for at least 45 days. As a result, lending institutions are very
diligent when seeking protection during the construction period. Your loan and progress
will be monitored very closely, and not only does the lender want to see the progress, but
compared to the overall loan facility (limit), the lender also must insure that there is
enough money to finish the project at any stage of the game. I would like to share
with you some guidelines that could avoid heartache, and financial failure.
If your lot is not paid in full before you started building, you'll probably run out of
money before you finish. The lender will want to pay the land from the first
advance, leaving less than an adequate amount to continue to the next stage.
If you are building your own home [general contractor], you probably will find difficulty
in locating a lending institution to grant you the loan, unless you are in th construction
business, full-time. Several potential homeowners want the shell of the house to be
constructed by an outside source, while leaving the interior to be completed by themselves
over a period of time. Lending institutions will find much difficulty in accepting
this arrangement, because the longer the project takes, the more chance of construction
liens, or loss of heart by the homeowner.
If your new home is a pre-fabricated house, you may need money to pay for the unit before
it gets delivered to your lot. The bank, on the other hand, will want the house
sitting on the foundation and hooked up to services (well & septic, hydro, and gas)
before it releases the bulk of the money. Again the reason being the potential for
construction liens, which take precedence to the mortgage.
If you don't have access to unsecured lines of credit for at least $20,000 or $25,000
you'll probably run out of money. If you a regular reader of this column, you know
that I regard the mortgage system as a challenge, and in most cases, the system can be
beat. When it comes to construction financing, the difficulty level escalates
dramatically.
I strongly encourage you to visit my website and under "Sun Articles",
go to the "construction financing" section and at least be aware of your
options. You'll find that I endorse "off-site security financing".
The easiest at least expensive method of building your new house is by using
another house for security during construction. With the advent of "title
insurance", drawing equity from a house that is already built (usually a family
member) by way of a secured line of credit is relatively easy and inexpensive. Once
you have access to this source of money, you can take as much time as necessary to build
your own house, granting your host the comfort of a mortgage on the house being built.
In other words, if your father granted you access to the equity in his house for
you to build your new residence, then while you are building, your father gets a mortgage
on your lot. Once your house has been completed, then it is relatively easy to now
mortgage this newly built house in order to payback your Dad. Good luck.
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