10 Tips for Building Your Dream Home

Another alternative is an end loan. These are usually offered by larger builders. The big advantage is that you make no payments until construction is completed. In effect, you are purchasing a newly constructed home, built to order, without financing the construction. Another advantage is that the interest rate is usually lower than a regular construction loan. A disadvantage is that the loan documents usually require mediation or arbitration in the event the customer is unsatisfied with the finished home.

7. Make sure the lender is flexible. For example, your construction loan documents may state that the project is required to be completed within 12 months. This means that you will have an "interest only" loan during the one-year construction period, after which your fully funded loan will convert to a regular mortgage with principal and interest payments. What happens if there is a delay?

Larger banks often charge a nonsense fee of 1% of the principal balance to extend the construction period. Right from the start, you should negotiate a construction extension agreement, stipulating how long the construction period can be extended and what the fees will be. If the fees are too high, choose another lender. Remember, because of the real estate slowdown, this is a very competitive business!

8. Watch out for hidden fees. In addition to the extension fees described above, there will be other charges, such as inspection fees. The lender will inspect the construction site before extending the next draw. For a local inspection, the fee should range from $75 to $100. In a rural area, the inspection fee may be as much as $150.