Understanding the intricacies of a construction loan is important, but we know that for many of you, the only thing that really matters is knowing what you will be expected to pay. When it comes to building a custom home, as much as we want to dream as big as possible, understanding what we will be paying and how we will be paying it is crucial. While each person’s loan will be based on their individual scenario, we’ll lay out the standard loan structure below for you to better understand what is in store.
How Much is the Down Payment on a Construction Loan?
There are three numbers that you’ll need to figure out in order to determine the down payment needed for your particular construction loan.
The cost of construction is easy to determine. This is the part of the proposal that you’ll receive from your builder. It’s key to work with a trustworthy builder like Schumacher Homes so that you can be sure that the detailed & itemized pricing you receive is accurate and protects you from price increases due to materials costs.
The appraisal value is determined by the appraiser who serves as an independent third party. The lender orders the appraisal but doesn’t influence the value. The appraisal value is the number that determines to be the value of your home once it is finished and gives the lender a bit of security knowing that they’ll be able to recuperate their investment through sale of the finished home if you aren’t able to pay them back in cash.
Once you have these two numbers, the calculation is simple.
The lender will loan you a percentage of the appraised value of the home. So, for instance, if the home is appraised to be worth $500,000, they will loan you $500,000 x (95% as an example) = $475,000.
The down payment will be your construction costs less the loan amount. So, if the construction is quoted to cost $500,000, your down payment will be $500,000 - $475,000 = $25,000.
If you’re just trying to ballpark the money that would be needed for a down payment, assuming 80% of the construction cost can usually work, but if money is tight and you need an accurate understanding of just how much you’ll need to pay, it’s well worth the few hundred dollars to have an appraiser come out and give you an accurate appraisal so that you can calculate the actual cost of a down payment.
How Much are the Monthly Payments on a Construction Loan?
The major difference between a loan obtained to purchase an existing home and a loan obtained for constructing a new home is when the money is paid. In a traditional mortgage, the lender pays the entire sum at once to the seller. You then, as the borrower, will pay the lender back for that loan over 15 or 30 years through monthly principal payments along with interest until the loan is entirely paid off. Construction loans aren’t quite as straight forward.
Construction loans differ in several ways. First, construction financing is actually two loans. The first one called the construction loan covers the payments to your builder during the time of building your home. The loan then converts to a permanent loan once the home is finished (it becomes your mortgage). During construction, the lender pays the builder in pieces, rather than right up front. This is essentially to ensure that progress is being made as promised. Many banks will do their own inspections after each phase of work prior to releasing the payment to the builder. Second is that you don’t start paying back the principal (the loan amount itself) until after construction is finished and the loan converts to a permanent loan. Along the way, you only pay interest during your construction.
So, how does this work and what does it cost?
Opposed to a mortgage, when you close on a construction loan, you haven’t actually been loaned any money yet, as all of the money comes in stages rather than up front. Since you haven’t been loaned any money yet, you don’t owe anything yet. Once your builder completes the first stage of the process, as agreed upon in the terms of the loan, the bank will take the first draw from your construction loan and pay the builder. When the builder completes the second stage of the process as documented in the loan, the lender will repeat this process - taking a draw and paying the builder. This will continue throughout construction.
You will only pay the lender based on what has been borrowed.
Let’s assume you’re at a stage in the process where you have borrowed $60,000 of a total $400,000 loan from the bank to pay your builder for the work that has been completed thus far.
Now, assume that the interest rate on your construction loan is 6%. That 6% is an annual figure, so divide that number by 12 (months) which makes the monthly interest rate 0.50%.
Now you know all you need to calculate your payment for the moment. $60,000 has been borrowed and the monthly interest rate is 0.50% so, $60,000 x 0.50% = $300. For the coming month, your payment is $300 which covers that month’s interest on the $60,000 borrowed.
The following month, if you have now paid out $70,000 to your builder, then you will pay $70,000 x 0.50% = $350 for that month’s payment.
Assuming our number from above, a loan total of $400,000, then during the final month of construction, once the entirety of the loan has been paid to the builder, you will owe $400,000 x 0.50% = $2,000 and that will be the largest of all your payments throughout the construction process until the loan converts to a permanent loan.
At this point, your construction loan will be converted into a permanent loan, or mortgage, and you’ll begin paying the principal loan back ($400,000) plus the interest, just as if you had purchased a home, until the entire loan has been paid back. The lenders that we work with at Schumacher Homes make this a very simple process, allowing you to get moved into your new house without financial complications at the end of the construction process.
In Conclusion
The primary items to understand for a construction loan are that you’ll typically be paying a percentage of the appraised value of your home in a down payment, and that you only pay interest on the amount of money that has been borrowed over the course of construction, not paying back the principal until after the home is complete and your construction loan converts to permanent loan.
Schumacher Mortgage LLC (NMLS #2101256) is Schumacher Homes’ affiliate which specializes in construction loans. Together, we want to make your dream home building a smoother experience from start to finish.
We have worked with Schumacher Homes on countless projects. Schumacher Mortgage Loan Officers are experts in construction loans, offer top level customer service, and offer you great loan terms and options. Very few banks and lenders are as experienced in construction loans. When you work with a traditional bank or lender that does not specialize in construction financing, you may have limited program options available to you and may experience delays, both in getting your final mortgage as well as in the construction of your new home.
But with Schumacher Mortgage, you should expect a smooth process from start to finish. Our team is comprised of people who have many years of experience working with Schumacher Homes. When you choose to work with Schumacher Mortgage as a Schumacher Homes customer, it means a streamlined construction draw process, meaning fewer building delays and a faster build for you!
Not only can we provide a collaborative, enjoyable experience when partnering with both Schumacher Homes and Schumacher Mortgage, you can expect competitive interest rates.
Schumacher Mortgage and Schumacher Homes are two separate companies. Schumacher Homes helped form, and has a major ownership position in Schumacher Mortgage, because it wanted to ensure that its customers would have both a wide range of flexible construction loan programs and superior customer service. Customers may seek home financing from the mortgage lender of their choice, but when working with both the Schumacher Homes and Schumacher Mortgage teams, we think customers obtain a more streamlined home loan process.
About Schumacher Homes
Schumacher Homes, based in Canton, Ohio, is America’s largest custom homebuilder, with operations in 30 markets in 12 states across the country. The National Housing Quality award winning company has built over 20,000 homes, customized to fit each family’s lifestyle, since its founding by Paul Schumacher in 1992. Schumacher Homes takes each customer’s inspiration and gives it a home. Each Schumacher Homes location includes a one-stop shopping design studio and model homes displaying the latest in architectural and product trends. Stop in today, be inspired and receive your no obligation price quote.