When you get ready to build your own home, there are many things that you will need to accomplish before you ever break ground. It is important to have a plan and know all the correct things to do ahead of time.

The first thing you may want to do is start working with a lender that is familiar with construction loans. You should complete a loan application and get pre-qualified for not just the construction loan but the takeout or rollover loan too. Make sure you discuss what you will do with your existing home. Will you sell it or rent it? By discussing your financial situation early, you won't make the mistake of wasting money by having plans drawn for a home that you can't afford to build.

After you know how much you can afford, you might want to look at some plans or interview architects and/or contractors. They should be able to give you an idea of what it will cost to have professional plans drawn.

Once the plans are completed, you can have different general contractors bid the entire job. Make sure they discuss quality of construction, changes, add-ons, and how flexible they are. Ask for references and check them out. Hiring a General contractor could be the most important thing you do. You will be in a close relationship with him or her for the next 6 to 9 months. Make sure that you both understand each other and document everything discussed in writing.

After the general contractor has been hired, he or she will work with the lender to provide the necessary contractor documents for the construction loan. When you have closed escrow on the construction loan, it will be time to start building.

Loan to Value:
Most construction lenders do not like to lend any more than 80% of the appraised value of the completed home and land. The borrower should have 20% of that value either from cash into the deal or land equity. There are some programs that will lend up to 90% of the appraised value; however, those programs usually have a higher interest rate and tougher qualifying standards.

Time:
Most construction loans are from 6 to 9 months in duration. There may be extensions of a month at a time, in case your project takes longer than originally scheduled. These extensions may have a fee associated with them. It is especially important to know the extension terms when you are building in the winter because of weather related delays.

Types of Loans:
"All in One" or "Rollover": Most "all in one" or "rollover" loans will lend you money for the land purchase, construction of the home and the permanent home loan all in one transaction. The loan starts as a normal construction loan with interest due monthly on the funds drawn out. After the construction period the loan begins to amortize with principal & interest payments due monthly. The benefit is the borrower only has to qualify & sign loan papers one time. The drawback is that the loan interest rate may be higher than the current market. There are some loans that have a prepayment penalty for the first few years, which would make it difficult to refinance.

Construction Only:
Usually fixed for the construction term for 6 to 9 months, at an interest rate that is higher than the normal home loan interest rate. You also pay interest on only the amount that is drawn out each month. The loan is due at the end of the construction period, so it will have to be replaced by a "takeout" loan, (a home loan that "takes out" or replaces the construction loan). The benefit is that there is more flexibility in underwriting, and you have a choice from a wide variety of different permanent loans.

Draw vs Voucher
Draw System:
The majority of construction loans use the draw system. A draw system allows the owner or contractor to draw out funds from the lender based on the stages of completion of construction. The owner or contractor can then use those funds to directly pay for labor or materials. The number of draws can vary anywhere from 5 to 10 disbursements during the construction period, depending on the lender's policy. The advantage of this system is that the owner or contractor has more control over the money.

Voucher System:
In the voucher system, the owner or contractor presents individual bills or receipts to the lender for reimbursement or payment. The lender then pays or reimburses upon receipt. The advantage of this system is that bills will be paid without regard to stages of completion of construction.

You may have other questions not discussed here that are unique to your situation. Consultation with a real estate agent and/or loan officer familiar with construction loans, is a very good idea.