You checked that you qualify for financing early on. You found the best designer for your new home, accessory dwelling, or remodel. You’ve got your plans drawn up, have gotten the permits you need, and even have a contractor bid.
Now that you know how much your big project will cost, it’s time to lock in your financing. What can you expect when you talk to the bank? And what’s the best way to pay for your construction project?
If you need a construction loan, here are the basics:
- Talk to a banker and get a verbal preapproval before you start spending money on design and permits.
- Send the personal documents the bank needs. They’ll want to see W-2s, your state tax returns for the past two years, your federal tax returns for the past two years, your last two pay stubs, and a letter about how you’ll use the funds.
- The bank will also want to see your construction documents and permits. (Note that at this point, you’ve most likely spent around $20,000 to $50,000 to begin the design phase and get these documents created.) They’ll also want a bid from your contractor and the construction agreement that you will use.
Once the bank has reviewed these documents, you’ll receive approval for your loan. Once the loan closes, you’re almost there, but there is a lot of paperwork to do if you have a remodeling loan.
Things to consider when you take out a construction loan
When you get a bank loan to build your ADU, remodel, or new home, you’ll want to keep a few things in mind.
There may be a time limit. For example, with Umpqua, you’ll have 12 months to finish the construction after the loan closes. If your project isn’t finished by then, don’t worry. An extension is easy to get and costs about $500.
Many contractors are wary of loans. Depending on the type of loan you get, your contractor may increase their bid by 15% or more to account for delays and paperwork. They won’t tell you this, but they may feel they have to increase their bid to absorb the often 30–60 day waits for banks to send payments or 100+ hours of extra paperwork to talk to the bank admins. To put your contractor at ease and avoid that significant price increase, consider a home equity line of credit (HELOC), cash-out refinance, or other source of capital that will limit additional work and waiting.
Financing a big project can feel overwhelming. When you’re talking about projects that run hundreds of thousands of dollars, it’s natural to feel a bit apprehensive. Once you’ve done your research and found the right source of financing, our advice is to remember that it will be more than worth it. Your new home will serve as a launchpad for your life and is an investment that will pay off over time. If you’re building an ADU or addition to rent out, it will pay for itself in just a few years. After that, it will be a source of income for generations. (Calculate your project’s economic benefits here.)
Is an FHA 203k loan the best choice for my project?
We’re sometimes asked whether an FHA 203k loan would be right for our clients’ projects. While you’ll need to talk to your bank and do some research into your specific situation, we recommend looking at other options. These loans carry several restrictions, and because payment processing is slow, many contractors refuse to work with them. (The slow payment processing can drag out a job for an extra six months or more.)
Need more advice? Click below to schedule a call with a project manager and discover how you can get a new ADU, new home, or remodel without unwanted surprises.