How to Refinance a Construction Loan

Construction lending is a "staged funding" loan that is temporary in that most residential home projects should be completed within 12 months. If the project is not completed per bank requirements, you might have to find a replacement construction bank so you can complete your project. This is one way to refinance a construction loan that you should avoid. If the project is almost completed, all you need is a "take out" loan, which takes you out of the construction loan and pays off the construction bank. In either situation, there are ways to solve your problem.

Difficulty: Moderate

Instructions

Things You'll Need:

• Proof of income documents (last 2 years W'2', 30 days of pay stubs),
• Bank statements
• Initial appraisal on the project.
• Declarations page from insurance policy
• Certificate of Occupancy (when applicable)
• Builder's license (if applicable)
• Builder's cost to complete (if applicable)
• Builder's contract (if applicable)

If your project is incomplete, know when to bail out with your lender

1. Exhaust all avenues of continuing construction with your present construction bank. In today's market, construction takeovers are difficult to find. If you are nearing your time deadline for construction completion, but the home is incomplete (and your present bank will not allow you to continue), find a mortgage brokerage that deals with many banks. This will give you more possibilities of lenders who will actually be willing to buy out your old construction loan, giving you more funds and time to complete the project. Not all construction lenders are willing to buy out and take over an existing project.

2. Apply for a refinance loan when you are 45 days from the estimated end of your project. If the project is almost complete and you do not have a permanent loan set up to take out the construction loan, do not waste any time in making an application with a lender. When the home is completed, the initial appraiser will do a final inspection on the home stating it is completed per plan and it is still valued at the original value. Your builder will need to provide a Certificate of Occupancy (CO) from your county building department. This is a final inspection indicating all stages of the home are complete, and it is safe for human inhabitants. Be sure these items are sent to your lender. Provide your new lender your insurance information as your builder's risk insurance will now become your homeowner's insurance.

3. Provide your new lender with information of who you used to close your construction loan. Using the same attorney/title company is advantageous because they already have all of your initial closing information, title insurance and other vendors used. If this is not possible, ask the new lender for its recommendation of another closer. Lender recommendations are a good assurance of high-quality customer service. If this were not true, they would not continue to use them.

4. Request a firm deadline from your builder as to when he expects all phases of construction to be completed. This is needed to coordinate final inspections prior to the closing and to schedule a closing date.
   In the event a new construction loan is paying off the old construction loan, be certain to find out when the new lender needs all construction and work on your project to stop completely. Be certain your builder is made aware as well.

5. Follow up with your lender, your builder and your closer for last minute details that can cause delays. Completing a construction project is a tough job. Finding a construction lender that will take over an existing project is even tougher. Both are frustrating and time consuming, and it is an education you may not have counted on getting. In either case, when you look back in a year at all you worried through, you'll know it was worth it.

Tips & Warnings

• Understand that stages of completion in construction should match your construction draw schedule. You can monitor this with your construction bank to be sure the project is on task and to avoid the situation of not completing your project with the bank you started with. If the draw schedule and stages of construction do not match, the lender will catch this, but having a contract in place puts the responsibility on the builder. If you are at the planning stage of building, consider a "construction-to-perm" loan, which will automatically modify to a permanent loan at the end of construction, saving you a second closing (and closing costs). While building a home, be aware of credit. Do not go out and buy furnishings on your credit cards or open new accounts. This can cause your credit scores to drop. When you apply for a new loan to pay off the construction loan, your credit report will be pulled. Low credit scores can cause your loan to be turned down.
• There are some areas where a construction takeover by another construction bank just isn't going to happen. The state of Alabama has some title requirements that do not allow a construction loan to be bought out and continued by another construction bank. Talk with your title company or attorney to be sure a construction takeover can be done in the event it is needed.