How Do We Finalize Our Home Construction Loan?

Reader Contribution by Jennifer Kongs
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The Small Home, Big Decisions series follows Jennifer and her husband, Tyler, as they build a self-reliant homestead on a piece of country property in northeastern Kansas. The series will delve into questions that arise during their building process and the decisions they make along the way. The posts are a work in progress, written as their home-building adventure unfolds.

A funny thing happened to us last week. We were told we could borrow a sum of money that is larger than I can imagine. I tried to envision it all stacked up in neat rows, and how much space it would need. I couldn’t. But, that’s just as well — we are imagining instead the walls, roof, flooring, driveway, drilled well and built-in root cellar that will make up our future home. We’re envisioning the tangible outcome of borrowing money from the bank.

Below, we’ve outlined our loan process, but each bank will have different terms and you’ll obviously have your own financial circumstances to meet. Full disclosure: Tyler worked for many years at a credit union, and so getting a loan is one area we feel more confident in than, say, septic system installation.

The basic steps of getting a loan to build a house: loan application and review of applicants’ financials, loan pre-approval, estimate of per-acre land value, submission of building plans and construction estimate, request for additional applicants’ financials, appraisal, title work, final approval. After this, the loan paperwork is signed and the builder can begin drawing funds from the bank. Each lender has their own set of criteria and process. For example, we will end up with two loans: one for the bulk of the land (about 30 acres) and one for the construction/house along with the remaining acreage (about 10 acres).

Some questions, based on our experience, we recommend you ask before you take out a home construction loan:

  1. Is there a set land to house value requirement? For our fixed mortgage 30-year loan, we need to split off 10 acres of land from the full property. The 10 acres will be the chunk we build the house on, and it will be added to the construction loan. This is because the loan requires that the house (based on our building plans and construction estimate) be worth a certain percentage of the total loan.
  2. What paperwork does the bank require to process the loan? We had to turn in several years of W-2s, recent pay stubs, bank statements and tax returns – the standard requirements for any home loan. Because ours is a construction loan, we also needed to turn in a signed contract with our contractor, proof of the contractor’s credentials, a copy of our building plans, and an itemized estimate of the total cost of construction. Also, in order to officially separate the 10 acres from the rest of the property, we need to register a land split with Leavenworth County (oh, man) and have that 10 acres officially surveyed, flagged, drawn up, and then filed with our plat (for a nice additional fee, of course).
  3. Any contingency details? For example, the sale of our current home is a contingency for our new loan. Some banks may require the sale of the previous house to be complete before the loan can be dispersed. This is not true for us — phew!
  4. How will the loan proceeds be dispensed? In other words, how does the contractor get access to the funds he needs for materials, hiring of subcontractors, labor, etc. Our contractor will submit monthly remittances to the bank, which will dispense checks as needed.

We hope this post helps others navigate the home construction loan process. If you’ve been through the process before and have additional advice, please leave it in the comments below!

Photo by Jennifer Kongs of our dog, Jackson, inspecting the future driveway site. The costs associated with laying down a new driveway will be covered by our home construction loan.

Next in the series:Working Outdoors: Perennial Plants, Trail Building and Cutting Firewood
Previously in the series: Which Renewable Energy Sources Will We Include in Our New Home?

Jennifer Kongs is the Managing Editor at MOTHER EARTH NEWS magazine. When she’s not working at the magazine, she’s likely in her garden, on the local running trails or in her kitchen instead. You can connect directly with Jennifer and Tyler by leaving a comment below!