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Build Your Dream Home: 7 Tips for a Construction to Permanent Loan

Did you know there is a loan that allows you to work with an architect and contractor to build the home you want? This financing option, called a Construction to Permanent Loan, also allows you the flexibility to afford building a new home while living in your current one.

It works like this: you take out a loan to pay your builder. During construction, you pay interest only. Once construction is complete, it converts to a mortgage. This streamlines the process of working with a contractor and a lender, avoids two closings, and locks in your interest rate at the outset of construction.

Andrew Trasatt, a Lender with First Midwest Bank, typically closes 30 to 40 Construction to Permanent loans a year; he has seen it all.  

“Every project is different. This can’t be emphasized enough – building a home involves a lot of moving parts and regional variations of best practices,” Trasatt said, “But I think these seven tips apply to anyone looking to build with a Construction to Permanent Loan.”

1. INVOLVE A LENDER FROM THE START

“This avoids wasting time and money,” said Trasatt. “Before you engage an architect and draft a customized set of building plans, make sure you qualify for the loan that will finance the construction of your dream home. A lender can walk you through the preapproval process and provide a framework for the financing of your project before you begin. Getting a lender involved early avoids unneeded expense, frustration, and disappointment.”

2. CONTROL THE PROPERTY YOU WANT TO BUILD ON

While this may seem obvious, purchase contracts contain contingencies. Customers often spend time and money designing a home renovation for a specific property before they have closed on the purchase.

“This is all about managing your risk,” said Trasatt. “For example, if you spend time and money designing a renovation on a home you do not yet own, the purchase may not close and you are left with a set of plans that can’t be used.

“Similarly, when you intend to build on vacant land, there are many specifics you want to verify before beginning your building plan. For example, is public water and sewer available, what type of electricity is being provided, is soil testing required? And you will want to build for the size and shape of that lot specifically. Better to buy the lot before you start making your plans.”

3. CHOOSING THE RIGHT BUILDER IS CRUCIAL

“You are going to be working closely with your builder for several months. Be sure he or she is reputable and someone you trust,” said Trasatt.

When looking for a builder, a good place to start is your potential lender. Most lenders keep a list of approved builders from previous projects. Many lenders will also allow you to choose a builder that is not on the list, provided they meet the lender’s approval requirements.

“Before selecting your builder, ask for references and call them,” said Trasatt. “Insight from others who have worked with the builder can be extremely valuable.” 

Choosing the right builder is more than developing a smooth working relationship. It’s also about avoiding the liability and headaches that comes from mistakes or slipshod work.

“You own the lot, the builder is just doing the work,” said Trasatt. “I’ve had clients tell me it’s not their concern if the builder makes a mistake since the builder is insured and will have to fix it under the contract. And to a point… that is true.

“But if a major issue occurs, you may end up in litigation with the builder and nobody wins then! Choosing a builder that is accountable, reliable, and skilled can avoid a lot of these problems from the outset.”

4. BUILDING YOUR OWN HOME IS MORE EXPENSIVE – BUT YOU GET WHAT YOU WANT

“It may be cheaper to buy an existing home,” said Trasatt. “But buying an existing home that has everything you want isn’t always possible. The customer will be restricted to what is available in the market and will likely end up compromising in many ways.”

“People think they can buy something similar to what they want and do a small renovation to ultimately get exactly what they want. This is certainly possible. But, once you add the cost of a renovation into the transaction, you often end up paying about the same or more as if you built from scratch,” he said. “If you want a home that is customized for you, the best way to achieve this is to build it yourself.”

5. PLAN FOR CHANGES

During the construction phase, plans change. Whether the price of lumber goes up, or you decide you want higher end fixtures than budgeted, expect to make adjustments on the fly.

“I’ve been doing this for years, and no job goes from beginning to end without changes,” said Trasatt. “The best thing you can do is budget for it. Once you lock in your loan, the final loan amount cannot change, so you need to have some reserves.

“A typical scenario runs like this: once it’s time to put in cabinets, your contractor gives you six options to stay in budget. But, when you’re looking at the options in the show room, you fall in love with cabinets that are an upgrade – and $10,000 more.

“By having reserves for the purpose, you can make that upgrade out of pocket without stress – you knew it was coming and you have the money for it. Better to plan that way than the reverse.”

6. IT USUALLY TAKES A YEAR

“The timing of a project depends on a lot of things, including the size and scope of your project, and the speed of permitting in your jurisdiction,” said Trasatt.

When it comes to budgeting time, Trasatt recommends allowing for a month or two at the beginning to develop your design and get your contract bid out. This step takes place before you even get approved for the loan.

Once your loan is locked in, your contractor will be able to give you an estimate for how long the actual build will take – this is the biggest variable. And then you should budget another month or two at the end for putting in the finishes and doing any touchups and final work.

“I’ve seen projects take as little as 6 months, or last as long as 2 years,” said Trasatt. “The average is about a year, from start to finish.”

7. DESIGN FOR EVERYTHING YOU WANT

Once a Construction to Permanent Loan is locked in, any changes or additions you want to make come out of your reserves.

“It’s a lot easier to scale down your project, than to scale it up,” said Trasatt.

“You have an opportunity to build a home exactly how you want it,” he said. “Add in everything you want, that you can afford. And if you decide you don’t need something – a swimming pool, for example – it’s far easier to cut it out of the project after loan approval than it is to add it in later.

“This is your dream home. You are going to want things to be special. Plan for that from the start.”

Andrew Trasatt is a Residential Lender (NMLS# 228674) with First Midwest Bank. Connect with him, or another of our experienced Residential Lenders, about taking out a Construction to Permanent Loan of your own.

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