Construction Loans

What is a Construction Loan?

Construction loans are short-term loans that offer consumers the chance to build a primary residence, shop, spec home or dream space with the flexibility of interest-only payments for up to 12 months.

Types of Construction Loans

	Construction Only Loans	Renovation/Rehab	Spec Home/Investor
Who is it best for?	Customers building from the ground-up. This could be a new structure, such as a home or shop.	Customers who want to improve their existing structure. Examples could be renovating a kitchen, bath, etc., or doing an addition onto existing home. This can be either a property being purchased or a property already owned.	Real Estate Investors looking to renovate an existing property to then sell for profit (also known as a “Flip”) or renovate and then hold as rental. Also available to Investors wanting to build Spec homes.
Pros	Payments are based only on what is used each month. Flexibility to be your own General Contractor. This could mean building a Shouse, Barndominium, Shop, Manufactured, or Modular Home.	Renovations will likely increase the value more than the money spent, which gets you a great return on investment.	These loans can include both purchase & rehab funds, as well as additional equity. The property can be multiple units. Equity gained from rehab may reduce the down payment or funds out of pocket.
Cons	Possible funds out of pocket required, depending on equity in land.	Inconvenience of living in a home while trying to rehab/renovate a space.	May require stronger financials.
Minimum Requirements	You can borrow up to 85% of the appraised value.	Can borrow up to 85% of the appraised value.	Can borrow up to 75% of the appraised value (after-renovated value)

How does a Construction Loan Differ from a Conventional Mortgage?

Construction Loan	Conventional Mortgage
Money is paid out in stages, as needed.	All money is given at once.
For ground-up building or renovating a space	For buying/refinancing a finished home.
Short Term (12-month loan term)	Long Term (up to 30-year loan term)
Interest-only payments during construction increase as more funds are used. No principal repayment	Monthly fixed payments include principal and interest.
Higher interest rate due to complexity/risk	Lower interest rate

What is the typical term length of a construction loan?

12 Months

What would my payments look like?

During the term of the loan, you make interest only payments. The interest rate is locked in at a fixed rate for the entire term.

How and when does the loan convert from a construction loan?

At the end of the 12-month term, you will need to get permanent financing. We provide in-house permanent financing as an option.

What is the overall process?

Pre-Qualification / Consultation:

We encourage every borrower to reach out as soon as possible to discuss ideas/projects, and to get income and credit verified with estimated max loan amount available.

Contract, Plans, Specs, Bids:

Borrowers will finalize the contract with the Seller (if property is being purchased), along with any rehab/renovation bids and plans/specs.

Loan Process Begins:

Borrower supplies the contract (if applicable), loan application, and renovation bid/plans/specs to the Loan Officer. Initial loan documents are provided, along with initial underwriting determination.

Appraisal (after-renovated value):

A certified appraisal will be ordered using the contract/bids/plans/specs to determine the max loan amount by the Bank.

Final Loan Approval & Closing:

Documents are signed to finalize the loan. Any required Borrower funds (down payment) are provided at this time.

Construction Phase:

Construction will commence. Invoices will be paid by the Borrower from a Farmers State Bank Construction Account. Inspections will occur from the Bank at various project intervals.

Refinance to permanent loan (if applicable):

Borrowers will start a loan application for their permanent loan (example: 30-year fixed), either with The Farmers State Bank or another institution.

Rates, Fees & Cost

How do construction loan rates typically compare to standard mortgages?
- Construction loan rates are typically higher than standard mortgages, as the bank is taking on more risk for a structure not yet completed. However, this is a temporary loan, so the higher rate is only until you get the build completed.

Interest-only payment explanation:

Monthly payments during construction are only based on what you pay for or use. Example: You take a construction loan for $300k, but only $20k is paid out in first month to pour concrete. You will have a monthly payment for that month based on $20,000 (not the full $300k borrowed). Your payment will increase over time as more funds are used.

Common fees (inspection fees, draw fees, etc.):

1% origination fee up to $2500. Upfront appraisal fee of $450-550, along with standard credit report, flood certificate, title work, and recording. No fees during the build itself.

When is the rate locked in?
- The rate is set when all plans/specs are finalized and sent to the Bank to begin the loan process. At FSB, construction rates do not typically change as often as other mortgage rates.

FAQs

Can I use my own builder?

Yes. FSB does not have specific builder requirements. You will want to do your own due diligence to make sure they are a good fit. If you would like to use a builder, but do not know names of any, we can provide you with a few options.

What happens if the construction goes over budget?

Since it is construction, we always recommend a borrower to have other funds on hand as a contingency of at least 10% of the build cost (Checking/Savings, Retirement, Stocks, etc.) During the pre-construction loan process, the Loan Officer will also look at available options in case this issue comes up down the road.

Can I make changes during construction?

It is expected that the Borrower/Owner will come out of pocket for the changes, or, if they are under budget to that point in the build, there may already be extra funds available to handle the changes.

What if construction is delayed?

While a 12-month period is usually more than enough for a build, we understand things happen such as weather, material delays, etc. The bank will work with Borrowers to ensure the project is completed.

Do I need a construction contract before applying?

No. Inquire with us as soon as you think you may want to build; even if it is still a year down the road.

Can land equity be used as a down payment?
- Yes. We will lend 85% of the appraised value of the project, so any land equity means less out of pocket for Borrowers.