Securing a Construction Loan

Best part of the TI-85: Tetris!

Thinking about our construction loan gives me a headache and makes me want to take a nap, but it's a must-discuss topic because: no money = no house.

Finding someone to loan you money to build a house is slightly more difficult than securing a conventional mortgage, but you'll generally take the same steps:

1. Start making phone calls.  We were referred to several lenders by our builder.  I put in a call to three different lenders and started to ask the basic questions: What sort of packages can you offer me?  What are your current rates?  Do you offer an all in one package (where the construction loan rolls into a conventional 30 year fixed mortgage at the end of the construction period)?
2. Start gathering documents.  You'll need at least 2 months of: bank statements, credit card statements, paystubs and 2 years of your W-2.  Basically you're going to be showing all of your assets and liabilities to your lender, which sort of feels like those dreams where you show up to high school naked.
3. Make an appointment to turn in your loan application.  You'll also want to have a chunk of change available to turn in with your application (think: several hundred dollars). 
4. Wait for the bank to approve your loan: This step is by far the longest in the construction loan process.  Basically the bank takes their sweet time checking all of the documents from step #2 to make sure that you're going to be a reliable customer.  Since construction loans are more of a risk to the bank, they want to make absolutely sure that you're financially stable enough to pay them back both during the construction period and after. 

The loan package that we selected was an all in one sort of deal.  That means that we pay interest only on the amount borrowed during the time of construction, and once the home is complete, our construction loan will automatically roll into a 30 yr fixed mortgage at the rate that was locked when we began construction (we scored a great rate of 4.875% on our 30 yr fixed).  In the event that rates dip a bit more once the house is completed, we can refinance into that rate with minimal penalty. 

Next up: Now you have the money, here's how you can use it