Building in Lake Chelan - Part II

Real Estate

Mar 9

Written By

– Construction Loan Basics —

Building a home with a construction loan sounds simple: you buy a lot, the bank helps pay for it, you move in. LOT + HOUSE = HOME, right? The math seems simple, but there are several steps along the way. Here’s an overview of the process.

Step 1: Secure Your Site

The first step in building a home in Lake Chelan is finding your dream lot. Once you’ve settled on the right dirt, make an offer with your Realtor. Purchasing the lot with cash gives you a quicker closing timeline and thereby more negotiating power (versus trying to purchase it with the construction loan). Your new equity in the lot will apply towards the down payment on your construction loan. Be sure to do your due diligence during the feasibility period. Learn more in Part 1 of this series.

Step 2: Define the Home Plan and Budget

Once you are a property owner in beautiful Lake Chelan, get to work on home plans. Preliminary plans need to be refined and sent local contractors for bid. Contractors will ask you to pick the style and quality of finishes you’d like in terms of flooring, countertops, cabinets, and doors and trim. This is the start of your dream home!

Step 3: Apply for the Construction Loan

After you have selected your favorite contractor, they will provide you with important documents including:

A construction contract containing the scope of the project, project price, and general terms of business.
An itemized expense list.

With these documents in hand plus your own financials (tax returns, etc.), it’s time to visit your banker. He or she will:

Help you formally apply for a construction loan.
Order an appraisal to make sure that the expected value of the home is in line with your construction contract and lot value.

Be prepared to pay 20% of the total value of your home (lot plus construction costs) as your down payment on a second home. Having paid cash for the lot will typically cover all or most of this down payment.

Step 4: Close the Loan and Start Building

Upon receipt of all documents, your bank will need 45-60 days to process the application. During this time, you can finalize arrangements with your builder and apply for your building permit.Upon closing of the loan plan on:

Paying for loan fees and closing costs.
Paying interest on the loan as your contractor begins to make construction draws. As your home nears completion, these interest payments will increase.

You play a vital role each month to monitor the progress of the construction. Each month, you will sign off on the work completed to date.

Step 6: Closing on the Mortgage

Fast forward five to eight months. Your home is complete! Upon issuance of a Certificate of Occupancy:

Your bank will create a mortgage for your new home. (Most construction loans are “one-step” in that they automatically turn a construction loan into a mortgage.)
Plan on bringing additional cash to closing to cover final closing costs (final appraisal, title fees).

Step 7: Move In & Enjoy!

Congratulations. You are a homeowner in Lake Chelan. Once you unpack the moving boxes, grab a beer and relax. It is time to start thinking about … landscaping!