Banks

In recent years most banks have developed a preference for modular homes construction financing versus on site (stick) construction financing. Never the less you should be aware that unless you are paying cash for your home and improvements, obtaining a Construction Loan will be necessary to facilitate any new construction project, including your Modular Homes Project. Here is some important information about Construction Loans for Modular Homes.

Consider the Following:

  1. Home "construction" loans are different from already build "mortgage financing".
  2. A construction loan is a line-of-credit that is used to pay pre-determined costs of a construction project.
    • Once construction is completed, the Construction line-of-credit is paid off with a residential mortgage.
  3. Typical pre-determined construction costs include
    1. the Lot purchase or payoff,
    2. permits and fees,
    3. the factory constructed home,
    4. on site costs
    5. any other subcontractors and suppliers who perform work and provide supplies as the job progresses.
    6. Also, the line-of-credit may provide for interest payments during the construction period and contingencies to cover potential cost overruns, as well as closing costs,
    7. construction costs may not cover 100% of your total up front expenses.
  4. Don't underestimate your need for up-front cash. Utilize the Typical Project Checklist. A Construction Loan does not pay pre-construction costs such as: Perk test, septic plan, soils engineering, building & foundation plans, plot and site plans, appraisal & credit reports or fees to municipality for plan check, etc.
  5. Initial Funds from Construction Loans are typically not disbursed until after the Site Plan has been approved by the local government agency and permit issued..
  6. Lenders normally have a fixed draw schedule tied to each part or phase of the construction project.
    1. Typically, the lender will send out an inspector to verify that specific work has been completed.
    2. If the inspection passes, funds will be released to pay subcontractors and suppliers who completed work during the inspected part or phase.
    3. If you request more draws than allowed per project, you may be charged a nominal fee per draw.
    4. Many banks have "fixed" draw schedules based on "work in place" or "completed" at pre-determined inspection points. MANY CREDIT UNIONS, SMALL LOCAL BANKS etc...are not equipped to properly handle funds distribution especially for a MODULAR HOME. If "stick built", the home construction period may result in several inspections and disbursements. The modular may represent more than 50% of your construction disbursement. You NEED a bank familiar with these payment requirements, including wire transfers of funds. We urge you to use one of our "experienced" lenders.

A type of Construction Loan can include both the construction line-of-credit and residential mortgage (end loan) as one loan known as a "Single closing loan".

What Will You Need:

  1. Start-up Construction Budget (use Typical Project Checklist).
    A start-up construction budget is a cash budget prior to obtaining your construction financing. Builders suggest anywhere from $5,000 to $25,000, depending on the size and scope of the construction.
  2. Up-front Expense
    This up-front expense is considered part of the overall project cost and is often part of the down payment or can be "reimbursed" as part of the construction loan.
  3. Down Payment
    A down payment may be needed depending on the size of the loan, your credit and if you currently own the lot or not. You don't have to own the lot to receive a 100% loan. The down payment, if required may be cash, equitable securities, or the equity in an existing home or land purchase. If you are using your home equity, make sure you obtain a true market value of your home and allow for time to sell your home.
  4. Planned Budget
    Know your limits. It can become tempting to add additional items to the home that will place the entire project out of budget. Some buyers have a budget cushion for upgrades and other changes
  5. Documentation
    Your submission of an application to the bank will require documentation of income and employment similar to a home resale mortgage application. Tip: Make sure you apply for a Construction Loan with a lender competent in Modular Home Construction Lending.
  6. The Construction/Perm Loans
    A Construction/Perm loan includes both the construction line-of-credit and residential mortgage as one loan. The Construction/Perm loan is a combined loan made directly by the lender to the borrower. It functions as a construction line for financing the construction of the home, and then it serves as a permanent mortgage by paying off the construction line after you complete the construction project. The Construction/Perm loan has some advantages, namely:

    1. The borrower can save money by paying for only one set of closing costs.
    2. Since the construction line is contingent upon approval of the residential mortgage, obtaining a construction/perm loan allows the borrower to submit and provide documentation for one loan application and work through one lending institution. The borrower will work with one loan and one lender.
    3. Because the loan is made directly to the homeowner, the borrower can take full tax advantage of the interest rate charges.

The Construction/Perm loan may also carry some disadvantages:

  1. Obtaining the best rate and terms. Construction/Perm loans may carry higher rates than prevailing market rates.
  2. Even though you may be working with one lender, usually the loan is managed by two separate departments. You may need to provide duplicate documentation. Talk with a representative to determine your best options. This will include verification of employment (e.g., W-2s, pay stubs), or if self-employed, documentation of income, savings and investment account statements. In addition, the lender will require construction specifications and cost breakdown for building your home. You will also need to provide the purchase contract or title to the construction site.