Add on-Building up? Construction 101

Having been in the construction financing industry for many years, I like to think of myself as an expert on what the terms mean. 

Many homeowners still love their existing neighborhood and there’s really nothing wrong with their current home, but they need more room or an update wouldn’t hurt – a remodel major or otherwise might just be the ticket.  For others, finding the perfect piece of land and then building their dream home from scratch is the only option.  

You know what I mean, that ideal front porch or back yard patio for summer afternoon family gatherings, that 3 car garage with amazing storage built in, that dream kitchen with Italian marble tile flooring and slab granite counter tops.  Your dreams are limitless – so your educational resources should be too.  I have put together some terms below to help you understand better what they mean and how they work: 

Remodel/Renovation – is all in one construction financing for primary and second homes.  Typically designed for extensive remodel. 

New construction – is all in one construction financing for primary and second homes.  

Hard Costs – direct costs associated with the labor & materials used for actual construction of the home.

Soft Costs –  Soft costs are indirect costs not directly related to labor or materials for construction.  They may include but are not limited to plans, permits and builder profit

Contingency FundContingency is money set aside for unforeseen circumstances or cost overruns that may occur during the construction or improvement of a home.

 Interest Reserve – Because a borrower may be currently paying a mortgage, some loans are set up with an interest reserve account.  If the borrower has an interest reserve account, interest payments for the loan are debited from the interest line item.  There are generally enough funds in an interest reserve account to cover all of the interest payments  that may be due during the construction term.

Insurance requirements – Fire Insurance policy with Course of Construction Clause and “All Risk” or “Special Form” coverage.

Construction Only – This is a loan that is designed for the construction term only.  No permanent financing attached.

Two-Step – There typically are two loans, one for construction and one once construction has been completed. 

All in one construction – One loan for both construction and permanent financing.  

Loan application – Items need to apply for a construction loan

A construction loan is unlike any other financing package you have secured for a home purchase.  When you are working with the same company for 1-18 months, you must have the confidence in all parties associated with the loan (builder, borrower and Bank) in order to guarantee a smooth transaction from beginning to end.  

The views , opinions and information expressed above are those of Jim Hungerford personally and are not associated with and organization or business and are for informational purposes only.

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