Question:
How many loans and/or escrows are needed to build our own home?

Answer:
It truly depends. You can have as many as three separate transaction, and as few as one. If you purchase the land at the same time you close a Hawaii construction loan, and that construction loan is a "single close" construction loan. In this case, you can get by with just one set of closing costs, and just one escrow. The other typical scenario has three sets of closing costs being incurred if you: 1) first purchase the lot, paying either cash or by securing a lot loan, 2) you obtain an interim construction loan once you have plans drawn and a builder/contractor lined up, and 3) you finally close a "take out" loan to provide the long term permanent financing.

Question:
What is a "Single Close" or a "All-in-One" construction loan? What makes it a good idea?

Answer:
An "all-in-one" / "single-close" Hawaii construction loan also serves as your permanent financing. This loan program is not just an interim construction loan, which would require a "take out" loan refinance at the close of construction to put the permanent financing in place. This "take out" loan would involve additional closing costs, you would also have to provide new and up to date income and asset documentation to qualify, and qualification would not be guaranteed. The best "single close" programs are usually based on an one Year Adjustable Rate Mortgage (ARM), which is combined with an aggressive offer to modify your note at the close of construction. The note modification typically is to a longer term fixed rate program at current market rates. Being a note modification versus a refinance, there is little or no cost, and the process can be as simple as signing a few pages and sending them back to the lender. You are not subject to re-qualifying, and you can avoid the substantial closing costs that can be associated with a traditional refinance.

Question:
Can construction loan programs be used to finance teardowns and major remodels?

Answer:
The quick answer is "yes". In these cases the amount which can be borrowed is usually based the future value of the house after construction is complete. Exceptions to this would be if the borrower had less than 10% invested in the deal based on the total cost, or the loan balance would be more than the site value, after the original home was torn down, in a teardown situation. This "rehab" construction loan can be a refinance on the home in which you currently live, or an acquisition rehab loan used to purchase a property which will be remodeled so as to be used as your primary residence.

Question:
If we are required to bring money into our construction loan transaction, when do we have to bring it in?

Answer:
When dealing with a single close / all in one loan you will only have one close of escrow so the funds will need to be available at signing. If you were contracting for a "spec" house from a builder, where the construction financing and the property were under the builder's name during the time of construction, there would be a close of escrow at the end of construction when you close the transaction and actually took title to the property. With an all in one loan, you are on title at the open of the transaction, and you already have your permanent financing. For example, say that you are required to bring in $150,000 to the deal to make it work, that $150,000 will be brought in up front at the close of escrow of the construction loan. If that $150,000 is more than the amount necessary to pay off the lot loan and cover closing costs, the excess money will more than likely be placed in an insured and interest bearing account in your name, and this money will be dispersed prior to borrowed funds being used. Lenders will not allow you to bring in your funds later, at the end construction for example, to finish the project. Lenders want to be sure that the funds necessary to close the project out are available and reserved for use at the beginning of the project. If this is not the case they risk ending with an unfinished house as their collateral. It is surprising how many novice borrowers and even green loan officers do not understand this part of construction lending.

Question:
Is it permissible to start construction using our own funds, and apply for a construction loan later when we need it?

Answer:
Each lender had their own guidelines, but most do allow work to have been started. There are lenders that require that less than 30% of the work be complete. In virtually every case, lenders will require clear title. Having construction in progress can lead to title problems. Title companies will require indemnification agreements to be signed by contractors and sub-contractors who have already done work. This is to protect against mechanics liens taking priority over a first mortgage lender lien. This issue most often arises when a builder becomes tired of waiting for the borrower to secure financing and is threatening to walk. Another possible problem that can come with starting your build "out of pocket" is that your cash reserves are depleted causing your borrowing position to weaken.

Question:
Are there instances where I can buy the lot using a construction loan, and when do I have to first get a lot loan?

Answer:
If you have found a lot that you like, and you wish to use a low rate "single close" construction loans to acquire that lot, you need to have a "close of escrow" long enough written into the purchase contract on the lot so that you can obtain plans and select a builder in that time frame. A construction loan only can close with architectural plans in place, an executed contract, and a detailed cost breakdown with a builder based on the architectural plans. From a practical point of view, if you happen to enter into a contract to purchase a lot, and you haven't yet begun working with an architect to develop plans, you're more than likely going to have to secure a lot loan or pay cash for the lot. A "single close" construction loan works best to purchase a lot in the event that the lot is already owned by the builder, and the builder already has architectural plans that you approve of for that lot.

Question:
If we already own the lot, how can we determine how much we are able to borrow?

Answer:
In most cases, you will almost always be able to borrow a percentage of the future value of the house, regardless of how long you've owned your lot in Hawaii or the total costs of the build. As the construction almost always appraises higher than total costs, this frequently works to your benefit.

Question:
When dealing with Hawaii construction loans, What is a contingency, and do I need to have one?

Answer:
A contingency is a line item in your cost breakdown that is not associated with a particular element of your build. In the event that, during the course of construction, you decide you want additional work done, or you decide that you want to upgrade your materials, you can use the money in the contingency line item to do this. Without a contingency line item, you would have to pay these expense out of pocket, as the loan amount on a construction loan cannot be upped during construction. If you are not already at the maximum loan amount allowed by your lender and you have enough room in the value of the appraisal, creating a contingency is generally a good idea. You must also be able to qualify for the increased loan amount. As you only pay make payments on the interest on the amount borrowed, you are not charged interest on contingency funds that are not used.

Question:
How many draws can my builder take, and exactly where does the money go once drawn down?

Answer:
This answer depends on the lender. Most construction lenders will have the builder propose a draw schedule. Generally, lenders typically dislike schedules that require draws at less than 3 week intervals. Funds are usually wired to the builders account, or to a joint account that requires both the builder's and the borrowers' signatures. These accounts are also set up specifically for the project under contract. Direct draws directly to the borrower are not uncommon as long as all parties agree in writing and the account is a specific construction account and not the borrowers' personal checking account.