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 Dear
Dr. Don,
I have a vacant lot worth about $225,000 or more
free and clear. I want to build my house on it.
My credit score is around 800. What type of loan
is available out there for construction of the
house? The cost to build will be about $200,000.
-- Gary Gables
 Dear
Gary,
Your two principal choices in financing the construction
are either a construction loan or construction-to-permanent
financing. There are pros and cons to both options. If
you have enough equity in an existing home, you
could also consider a home equity line of credit,
or HELOC, or home equity loan.
Construction loans are interest-only
loans, typically at a floating (adjustable) interest
rate. The builder receives draws from the
loan proceeds as construction progresses. The
loan comes due when construction is finished and
there is a certificate of occupancy on the property. Most
home buyers will need permanent financing to repay
the construction loan.
Construction-to-permanent financing
establishes the structure of both loans upfront.
Instead of paying closing costs on two loans,
there's only one set of closing costs. The
ability to lock in a fixed rate on the permanent
financing will depend on both your lender and
how long it will take to build the house.
The downside of construction-to-permanent
financing is that you lose some flexibility in
how the interest rate on the permanent loan is
priced. You may find that you can get a better
interest rate on the mortgage from another lender
but aren't able to easily switch to that lender
to capture that lower rate. Before applying for
this type of loan, get comfortable with the interest
rate lock provisions, construction timeline and
what happens if your rate lock expires.
Having a quarter-million dollars
of equity in the land makes it easier to find
a willing lender for either the construction loan
or the permanent financing. You've got a great
credit score. The only missing variables
are your income and expenses.
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