Construction Loan Process

Construction Loan Process

Interested in building a new home?

Learn about the steps in our construction financing process here.

1. Meet with a Bank Mutual Loan Officer

The borrower meets with a Bank Mutual Loan Officer to discuss loan programs and our qualification process. The Loan Officer can pre-approve the borrower and indicate the pre-approved loan amount.  If a formal loan commitment is required, the Bank Mutual “Approved First” process can start. Bank Mutual will verify and fully underwrite everything needed to issue your written loan commitment.


2. Pre-Plan with a Builder

The borrower meets with a builder or architect to discuss plans for the new home. The size of the home, style, amenities, and costs should be discussed at this time. Starting time and completion time for the construction term are also agreed upon.

3. Sign Final Construction Contract

All designs, specifications, and price for the home are finalized and the construction contract is signed. Borrower meets with a Bank Mutual Loan Officer to finalize the loan application. Bank Mutual completes the final loan processing and, upon approval, a loan commitment is issued to the borrower and a date is set for the loan closing.

4. Construction Loan Closing

The borrower meets with Bank Mutual or the title company to sign the final loan papers and necessary documents. If borrower does not already own a lot, it is purchased at this time. Bank Mutual sets up a construction loan account for the amount of the construction contract (loan amount plus down-payment) to ensure sufficient funds are available for completion of the home.

5. Builder Starts Construction

Construction on the home begins and the builder will ask for periodic or monthly draws as the construction proceeds. After the borrower authorizes a draw to the builder, Bank Mutual will disburse loan funds to the title company. The title company will then pay the builder in accordance with the terms of the disbursement agreement.

6. Interest Payments Begin

A 12-month construction period is set up where the borrower will pay interest only on the amount of loan funds in use during each month. Each month an interest payment (plus escrow for Real Estate Taxes and Private Mortgage Insurance, if required) will be due for the number of days loan funds were used during the previous month. As the builder requires additional draws, more funds are in use, and the amount of monthly interest that is due will increase. The monthly payment of interest will continue throughout the construction term.

7. Home Completed

Upon completion of the home, the builder will request the final draw on the construction contract. The builder and borrower will reconcile any overages or shortages from allowances in the construction contract. Bank Mutual will have a final inspection done showing completion of the home. After the borrower’s authorization, the final draw is made to the contractor through the title company.

8. Permanent Mortgage Starts

The borrower receives a final interest payment notice from the construction term. The following month, the loan repayment will begin with a full payment of principal and interest due. (A portion of the monthly payment is now applied to the principal balance.)

Spring

  • May 1 - Meet with builder and sign contract, receive loan approval from Bank Mutual

  • May 15 - Purchase lot, close on construction loan of $200,000; make down payments

Summer

  • June 1 - First interest payment may be $0, as borrower's funds are disbursed before loan funds

  • June 7 - First draw to builder is made for $40,000

  • July 1 - Interest due: $40,000 (6/7 - 6/30), assume 5.5% for 24 days = $147* 

  • July 7 - Second draw to builder is made for $100,000

  • August 1 - Interest due: $40,000 (7/1 - 7/6); $140,000 (7/7 - 7/31). $571 due*

  • August 10 - Home complete, final draw to builder made for $60,000

Fall

  • September 1 - Interest due: $140,000 (8/1 - 8/9); $200,000 (8/10 - 8/31). $865 due*

  • October 1 - Interest payment due on full loan of $200,000 (9/1 - 9/30); $917* construction loan converts to permanent mortgage

  • November 1 - First full principal and interest payment of $1,142.22* is due

*Escrow for Real Estate Taxes and Private Mortgage Insurance, if required, will be collected in addition to the monthly interest payment.