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 complicated process Unlike traditional mortgages, construction loans require more steps and documents to get approved This is because the lender is taking on greater risk by financing the building of a home that doesn’t exist yet.
Knowing what to expect and the key steps involved can help make the construction loan process smoother. Here is an overview of the typical construction loan timeline from start to finish
Step 1: Prequalification
The first step when applying for any loan is getting prequalified This involves providing information about your income, assets, debts, and credit score to give the lender an initial snapshot of your finances.
Prequalification for a construction loan is more rigorous. In addition to verifying your financial qualifications, the lender will also want to assess:
- Your construction plans and budget
- Your choice of builder
- Your ability to make loan payments during the building phase
Gathering all the required documents upfront will help speed up the prequalification process. This can take anywhere from 2 days to 2 weeks depending on the lender.
Step 2: Submit a Loan Application
After getting prequalified, you can formally submit a construction loan application. This involves providing extensive documentation including:
- Detailed construction plans and specifications
- Itemized cost breakdowns for materials and labor
- Construction timeline with draw schedule
- Proof of property ownership or land purchase contract
- Builder’s credentials and copies of insurance/licenses
- Your income and asset documentation
It’s important all this information is complete and accurate. Missing documents will delay the application process.
Step 3: Appraisal and Plan Review
The lender will order an appraisal of the land value if you already own the property. Or they may ask for a feasibility study to determine the value of the home once built.
Your building plans will also go through architectural review. This ensures your home design meets all zoning and code requirements. Any issues will need revision before loan approval.
Step 4: Loan Underwriting and Approval
After collecting all required information, the lender will underwrite or assess your construction loan application. This involves analyzing:
- Your creditworthiness and income
- The appraised value of the property
- Your repayment ability based on total costs
- Overall risk of the project
Provided the lender is satisfied, they will issue a loan commitment letter detailing the approved loan amount and terms.
Step 5: Loan Closing and Payments
With approval in hand, it’s time to close on the construction loan. This legal process makes the loan official. You’ll sign loan documents and pay lender fees at closing.
Rather than receive the full loan amount upfront, funds are paid out incrementally as certain stages of construction are completed. Lenders inspect progress at each “draw” before releasing payment.
Step 6: Construction Phase
Now the fun part begins! You’ll work with your chosen builder to bring your architectural plans to life. The lender will monitor construction progress until the home is finished.
During this phase, you will only make interest-only payments on the loan amounts drawn. Full principal and interest payments don’t start until construction is complete.
Step 7: Conversion to Permanent Financing
Once the home is finished, inspected, and deemed livable, it’s time to switch to traditional mortgage financing. Your construction loan can either:
-
Convert to a permanent mortgage with the same lender
-
Be paid off by obtaining a new mortgage with a different lender
Conversion is simpler as it avoids a second loan application. But shop around to find the best permanent financing option.
Step 8: Making Mortgage Payments
Now that construction is complete, you can move into your brand new home! Make sure to budget for full monthly mortgage payments. These will be higher than the interest-only construction loan payments.
Enjoy creating memories in the home you brought to life with a construction loan! Just be aware the entire process takes 9-18 months on average. Proper planning makes navigating these key steps much smoother.
Frequently Asked Questions
How long does a construction loan take?
The typical construction loan timeline is 9-18 months. It can be as short as 6 months for a simple project or over 2 years for a complex custom home. Weather delays and other unforeseen setbacks can also lengthen the process.
What are the requirements for a construction loan?
Construction loan requirements include good credit (680+ score), 20-30% down payment, low debt-to-income ratio (under 45%), stable income, and a detailed construction plan with a reliable builder.
When can I move into my new home?
You can move in as soon as the home is finished, passes all inspections, and is issued an occupancy permit by your local building authority. This is usually 1-2 months before construction loan payoff.
How much does a construction loan cost?
Construction loans have higher interest rates and fees than mortgages. You’ll pay loan origination fees up to 2% of the loan amount plus interest-only payments during construction. Total costs often add up to 6-8% of the loan amount.
What if construction costs are higher than expected?
It’s common for new construction to go over budget. Ask your lender if they offer contingency reserves that provide extra funds if your builder needs more money to complete the project.
Can I get a construction loan to renovate my current home?
Yes, some lenders offer renovation loans that work similarly to construction loans. You receive payouts as work is completed until the remodel is done. Requirements are less stringent than for new construction.
What happens if I can’t make loan payments during construction?
If you anticipate having trouble making payments, ask your lender about interest-only reserves. This allows you to pay interest from reserved loan funds rather than out-of-pocket during the building phase.
A construction loan allows you to build the home of your dreams. Being prepared for the step-by-step process will help your project go as smoothly as possible. Reach out to lenders to get prequalified and start your construction loan timeline today.
Step 1: Pre-Approving Your Permanent Mortgage
Your financing package will actually include two separate loans.
- The initial interim construction loan allows for advances or “draws” to pay for building expenses during construction or remodeling. Interest is paid monthly on this loan and it has a maximum term of 12 months. It is important to work closely with your lender during this time to assure a smooth transition between loans.
- Once your home is built, a permanent loan or “mortgage” will be made to pay off the interim loan. The mortgage will be paid back monthly for a period up to 30 years.
The first step in building your dream home is meeting with your BankWest lender to determine how much you can borrow for your construction project. BankWest requires that you pre-qualify for your permanent mortgage before the interim construction loan is considered. To pre-qualify, you must demonstrate that your income will cover loan payments, closing costs and other loan expenses. In addition, our lenders will look at any existing debts you may owe and your down payment amount. Please keep in mind, there are loan programs available that allow borrowers to buy or construct a home with small down payments. Eligibility and requirements will be based largely upon financial and credit history. Based on your individual situation, your lender can explain your options.
To pre-qualify for a loan amount and purchase price, you must provide the following information for each applicant, as well as a completed mortgage application:
- W-2(s) for the last two tax years
- Recent pay stubs covering the past 30 days
- Tax returns (both personal and business) for the most recent two years, with all attachments
- Most recent bank and investment statements, showing funds available for closing costs and down payment
Additional information may be required, but the items listed above should provide a strong indicator of what you can afford to borrow. Finally, BankWest will request a credit report for all applicants to help determine a maximum loan amount. When all of this paperwork has been completed, you will receive a “good faith estimate” and a fees worksheet showing construction loan and permanent mortgage costs, based upon that loan amount.
Please keep in mind that financial changes during the construction loan process may impact your eligibility for permanent financing. Those changes may include: your employment status, decreased income, increased debts or late payments on your credit report. If you have any financial or employment changes during the term of the interim construction loan, it is very important to work with your lender to assure that you have an updated plan for the permanent financing.
Step 2: Choosing Your Contractor, Building Site and Floor Plans
Now the fun begins! It’s important to choose a trusted home builder to help you create a floor plan that will meet your current and future needs. These needs should be considered before the first nail is driven, as changes during construction can result in costly change orders. A reputable general contractor should know all of the costs associated with your building project and will ensure all expenses are included in your total construction cost. BankWest requires only one written bid, but you may want to get at least two bids from comparable contractors.
Finding your perfect building site should also occur during this time. We know you will be anxious to get things started, but there are a few things to remember when selecting and/or preparing your land for the project:
- Site preparation, including tree removal, cannot begin before closing on the interim construction loan.
- Proof of builders’ risk insurance must be provided before closing on the interim construction loan. Ask your lender about obtaining a quote from one of our experienced BankWest Insurance agents.
- All utilities, wells and septic tanks must be located within the legal description you are building upon.
- Other homes located on the property must be removed during the term of your initial construction loan.
- The property should generally be no more than 10 acres. Please ask about exceptions.
- If the lot is being surveyed from a farm or larger acreage, the steps required to get the new legal description approved by the county can take several weeks. Please plan accordingly.
Once your floor plans are completed and building site has been secured, an appraisal will be ordered to determine the market value of your home. BankWest will require the following information to complete the appraisal:
- All house plans and specifications.
- Bids from your builder.
- A purchase agreement or deed for the land you plan to build upon.
The appraiser will also visit the building site and use comparable sales information to determine the fair market value of your home. This value will help set the limits for your interim construction and permanent mortgage loans.
When the appraisal is completed and final costs are determined, BankWest will order the title work and approve your interim construction loan. The next step is closing that loan and beginning to move some dirt!