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The construction perm loan process, short for construction-permanent loan, is a type of financing used for building a new home or renovating an existing property. It combines the features of a construction loan, which funds the building phase of the project, with a permanent mortgage that converts once construction is complete. Here’s a step-by-step overview of the construction perm loan process:
Prequalification: The borrower (homeowner or developer) begins by meeting with a lender to determine their eligibility for a construction perm loan. This involves providing financial information such as income, assets, and credit history.
Initial Application: Once prequalified, the borrower submits a formal loan application to the lender. The application includes details about the construction project, such as plans, cost estimates, and timelines.
Approval and Underwriting: The lender reviews the application, assessing the borrower’s creditworthiness and the feasibility of the construction project. This process may involve verifying income, appraising the property, and conducting a title search.
Loan Agreement: If approved, the lender provides a loan agreement outlining the terms and conditions of the construction perm loan. This includes the loan amount, interest rate, repayment schedule, and any other relevant terms.
Closing and Disbursement: Once the loan agreement is signed, the borrower pays any closing costs and fees associated with the loan. The lender then disburses funds for the construction phase of the project as needed, typically in predetermined stages or “draws.”
Construction Phase: With funding in place, construction begins according to the project timeline and specifications. The borrower works with contractors and builders to oversee the construction process, ensuring that work is completed to satisfaction and in compliance with building codes.
Inspections: Throughout the construction phase, the lender conducts periodic inspections to verify that work has been completed as planned and that funds are being used appropriately. These inspections help mitigate risk for the lender and ensure the quality of the finished property.
Conversion to Permanent Mortgage: Once construction is complete, the construction loan transitions into a permanent mortgage. This involves finalizing the loan terms, such as the interest rate and repayment schedule, and updating the loan documentation accordingly.
Final Inspection and Appraisal: Before finalizing the permanent mortgage, the lender may conduct a final inspection and appraisal of the property to confirm its value and condition. This helps determine the appropriate loan amount for the permanent mortgage.
Closing on Permanent Mortgage: With the construction project successfully completed and all requirements met, the borrower closes on the permanent mortgage. This involves signing the necessary paperwork and paying any remaining closing costs and fees.
Repayment: Once the permanent mortgage is in place, the borrower begins making regular payments according to the terms of the loan. These payments typically include principal and interest and continue until the loan is fully repaid.
Overall, the construction perm loan process involves careful planning, coordination, and oversight to ensure a successful outcome for both the borrower and the lender. By understanding the steps involved and working closely with experienced professionals, borrowers can navigate the process with confidence and achieve their construction goals.