The key to a positive home-building experience is understanding the construction process and how a construction loan works. With this in mind, we are sharing these six basic steps to securing a BankWest construction loan and ultimately converting it into a permanent mortgage. 
Getting a construction loan to build your dream home can be an exciting yet stressful process. From selecting the right lender and contractor to securing permits and inspections, the construction loan closing brings together many moving parts. In this article we’ll walk through the key steps in the construction loan closing process so you know what to expect.
Overview of the Construction Loan Closing Process
The construction loan closing process has six main steps
- Pre-qualify for your permanent mortgage
- Select your contractor and finalize plans
- Close on the construction loan
- Make draw requests during construction
- Lock in your permanent mortgage rate
- Close on the permanent mortgage
This process involves two loans – the short-term construction loan which funds the building phase, and the permanent mortgage which kicks in once construction is complete.
While every lender has slightly different requirements, the general stages are similar. Being aware of what to expect can help the process go smoothly.
Step 1: Pre-qualify for Your Permanent Mortgage
Before you can get approved for a construction loan, you need to pre-qualify for the permanent mortgage that will take effect once construction is complete.
Pre-qualification involves submitting information to the lender including:
- Income verification documents like W2s, recent pay stubs, and tax returns
- Bank and investment account statements
- Information on any existing debts
- Your intended down payment amount
The lender will review your income, assets, debts, and credit history to determine the loan amount you qualify for.
You’ll receive a pre-approval letter with an estimate of your costs for both the construction loan and permanent mortgage. This helps set expectations upfront.
Step 2: Select Your Contractor and Finalize Plans
With pre-qualification handled, it’s time to find a general contractor and settle on your final building plans.
Vet potential contractors thoroughly and get references to find someone reliable. Get at least two bids to compare costs.
Finalize the plans and specifications for your home. Any changes later on can delay the process and result in costly change orders.
Once you’ve selected a contractor and finalized plans, the lender will order an appraisal. This establishes the home’s market value which is used to set loan limits.
Provide the appraiser with all your house plans, contractor bids, land purchase paperwork, and other relevant information.
Step 3: Close On the Construction Loan
After the appraisal is done and terms are finalized, it’s time to close on the construction loan. This usually happens at the title company or lender’s office.
At closing you’ll sign the loan documents like the mortgage, promissory note, and disclosures. Any existing mortgages on the land will also be paid off.
Construction can then begin! The contractor typically needs a few weeks lead time to schedule crews and deliver materials.
Most construction loans have a 12-month term. You’ll make interest-only payments each month over the construction period.
Step 4: Make Draw Requests During Construction
As construction progresses, you’ll make periodic “draw requests” to receive payouts from the loan to pay the builder and suppliers.
Submit all invoices to the lender with each draw request. It usually takes about 3 days to receive the funds.
The builder will sign lien waivers with each payout to confirm they’ve been paid for that portion of the work. This protects against liens being filed.
Carefully track all expenses, including those you pay out-of-pocket. Provide details on these too for complete financial transparency.
Step 5: Lock In Your Permanent Mortgage Rate
As construction nears completion, it’s time to lock in an interest rate on the permanent mortgage. Rates fluctuate frequently, so locking in secures that rate for a set period (typically 30-60 days).
To determine a final loan amount, the lender will collect updated financial information from you including income verification, bank statements, and a refreshed credit report.
Locking in the rate once the home is complete – but before the permanent loan closes – can save money. Most lenders allow rate locks 30-60 days out from closing.
Step 6: Close on the Permanent Mortgage
In the final step, you’ll close on the permanent mortgage that will finance the home long-term.
First, the lender orders a final inspection to confirm the home is complete and upto code. There may also be a final appraisal.
Finally, you’ll sign the permanent mortgage paperwork. This loan pays off the construction loan and any remaining balances.
Within a few days, the title company will record the new mortgage and deed then transfer funds to the lender.
And that’s a wrap! With the permanent mortgage in place, construction is complete and your new home is yours to enjoy.
Tips for a Smooth Construction Loan Process
While the construction loan process may seem complex, being prepared can help it go smoothly:
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Don’t make any major purchases during the process as this can negatively impact your debt-to-income ratio. Wait until after closing.
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Maintain strong payment history on all existing credit accounts to keep your credit score high.
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Keep your income stable and don’t change jobs without alerting your lender.
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Save all pay stubs and account statements to make documentation easy when it’s time to lock in permanent financing.
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Avoid taking on new debt as much as possible to prevent delays.
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Be responsive to all lender requests for documentation to keep things moving.
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Keep your lender updated on any changes in your financial situation to troubleshoot potential issues proactively.
Following these tips will make for a smoother construction loan closing process. Though it takes coordination, understanding what to expect will set you up for success. With smart planning and an experienced lender, you’ll be moving into your dream home before you know it!
Step 3: Closing on Your Interim Construction Loan
When it’s time to close your construction loan, we will meet at the bank or title company to complete the necessary paperwork including a note, mortgage and other disclosures. If there is a lot loan, it will be paid off at this time. If you are ordering a manufactured home, modular or system-built home, BankWest can now disburse necessary funds for the down payment and your new home can be ordered. Generally, closing costs must be paid by the borrowers at the time of closing and cannot be rolled into the construction loan.
BankWest construction loans are generally written for a period not to exceed 12 months. During that time, you will be required to make monthly interest-only payments on the amount of the construction loan you have secured. This interest will be due on the first of each month.
BankWest may elect to have on-site inspections done on certain construction loans during the building process. This is simply an internal audit and in no way should be construed as monitoring for building code or construction adequacy, quality or accuracy. Certain government guaranteed or insured loans may also require inspections. We will provide you with more information if your loan is subject to these inspections.
After the initial construction loan is closed, the builder can begin construction.
Step 5: Locking the Rate on Your Permanent Mortgage
You’re almost done! All of the remaining costs and expenses have been tallied. Your general contractor submits a final bill. You and the lender agree upon the final loan amount. What now?
Interest rates may be locked up to 30 days before your home is completed, but you must know the final loan amount. This may require a final bill from your contractor. It is good to contact us near home completion so we can discuss timing and rate lock options with you. You will most likely choose to do a rate lock with a 60-day expiration. *
When you meet with us to discuss locking the permanent loan rate, we will update your income information, request new bank or investment statements and order a new credit report to review current debts. Be sure to save your paystubs, as well as bank and investment statements, during the construction loan process to make these easier to find when the final permanent loan information is being compiled.
When your home is finally completed, we will need 30 days to update your file and close the permanent financing. During this time, an appraiser will reassess the home’s value. In addition, any final inspections required for financing will be performed. If a survey was not completed during construction, we will order the final survey showing that your home was built inside the legal description (a requirement by the title company). Finally, the necessary title work will be updated to show there have been no liens filed against the property since construction began. Your BankWest loan officer will then submit your permanent financing application, along with the appraiser’s final inspection report and photographs, to underwriting for final loan approval. BankWest does most underwriting in-house. Underwriting must give final approval to complete your permanent loan.
*Extended lock programs are available for new construction loans. Additional fees may be required. Ask your loan officer for details.
Under Construction-1 Time Close vs. 2 Time Close Construction Loans
FAQ
What happens at the end of a construction loan?
What is the timeline for construction loans?
What are the three phases of a construction loan?
What is a two-closing construction loan?