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Frequently Asked Questions
Answers to Your Questions About Construction Loans
As you consider a Construction loan, you may have some basic questions about how the loan functions. The following is a list of the most frequently asked questions.
What is a Construction Loan and how does it differ from a Permanent Loan?
A regular (or permanent) mortgage loan provides funds for an existing home. A Construction Loan covers both the cost of building the home as well as the Permanent Loan. Also, with a Construction Loan, funds are advanced in increments as the home is being built, which differs from a Permanent Loan where money is given upon completion of a home or on an existing home.
How will American Savings Bank help me determine how big a mortgage I can qualify for?
There are five areas to determine a mortgage loan amount you can qualify for: income, debt, savings, credit and property. By discussing these items with you, American Savings Bank will be able to assist you in determining a realistic loan amount and also establish your budget for home construction.
Will I need insurance during construction?
Yes, for both fire (and Builders Risk) and hurricane insurance and in some instances, flood insurance. Once you have selected your insurance company, advise the loan officer of your choice by giving them the company name, agent’s name and phone number.
How is my contractor paid?
When a draw is authorized by you in writing, American Savings Bank will forward the proceeds to the bonding company who distributes the funds to the contractor, subcontractors, etc. If a surety (usually an insurance company) bond is used, then the proceeds are forwarded directly to the contractor.
When do my payments on the loan start?
Upon first disbursement of loan proceeds (which may be at time of loan closing), your first payment will be due the following month. You will be sent interest billings on a monthly basis. Upon completion of the construction and the final disbursement of loan proceeds, your permanent loan payments will begin. The exact payment date will be disclosed in your Mortgage Note. If construction is completed earlier than scheduled, your permanent loan payment date may begin at an earlier date. If construction is delayed, you must request a postponement of the permanent loan payment start date in writing.
What is the interest rate?
Your interest rate will be set at loan approval, subject to rate lock agreements, if any, in effect at that time. For Fixed Rate Loans, the same rate will apply during construction and during the life of the Permanent Loan. For ARM loans, the initial rate will apply during construction and the initial period of the Permanent Loan that corresponds to the type of ARM loan selected.
What can my contractor start working?
It is very important that no work of any kind be done on the property until your loan closes and your mortgage has recorded. At that time, the contractor may begin building your home.
What happens if I make a change to my home's specifications or plans after construction has begun?
You must first work with your contractor in determining if the change results in higher or lower costs. In either case, a Change Order must be completed with copies given to both American Savings Bank and the bonding company. If the change results in higher costs, you must give this amount to us; we will combine these funds with the construction funds and disburse them for you. If costs decrease, you must receive our consent to proceed since we must be sure that the change does not adversely affect the value of the property.
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