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Step 1
Find a bank or lending institution that offers construction loans. Ask the loan officer questions to ensure that he has experience in this area. Construction loans are more complicated than a home mortgage, and you can easily run into problems (such as your loan amount or the monthly payments being completely different) if not processed correctly.
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Step 2
Get pre-approved so you know how much house you can afford. Be ready to explain whether your house will be owner occupied and how long you intend to live in it or whether you want it for investment purposes. These factors determine your finance options.
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Step 3
Determine whether you want to lock in your rate or let it float hoping that interest rates go down. Make sure you understand whether the rate will remain the same once the construction loan converts into a mortgage (after finishing the construction).
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Step 4
Enter into a written construction contract with a builder once you have selected a reputable one. The contract should clearly outline each party's responsibilities. Additionally, it should include the amount the builder expects to receive and any contingencies (for example, contingent upon passing inspection). It should also state whether the amount includes sales tax if applicable.
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Step 5
Obtain the necessary insurance. Banks normally require construction and liability insurance (which you or the builder can provide if he carries it). Some banks also require workman's compensation. If the builder subcontracts his work, he'll need to write a letter stating that he doesn't have employees.
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Step 6
Make sure the loan is properly structured. Consult with a real estate attorney if you have any doubts.
