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Basics of Building

Building your new home can sound daunting or intimidating, but it is relatively easy once you learn the basic process.Construction Financing, Permanent Financing, and two types of building contract structures.


Most lending institutions will provide to qualified applicants what is known as a "construction loan". The construction loan will provide disbursements to pay for the monthly cost of the actual construction. Work is performed during a given month and at the end of the month the bank will issue a draw for the percentage of the work completed during that period. Once the home is completed the construction loan will be rolled into permanent financing by a mortgage company at a much lower rate.


There are two basic types of contracts: The first type is a "Stipulated Sum Contract". This is a guaranteed maximum price contract.The Stipulated Sum is the most commonly used contract. Allowances are provided in the contract for items whose cost is unknown at the signing of the contract. After all of these items have been selected by the owner and purchased, a reconciliation statement is provided to total up the actual cost of the allowances. If the total cost of these items exceed the allowance amount then the owner will pay the overage and vice versa if an item is less than the allowance the contractor will credit. An example would be for plumbing fixtures, flooring, tile, cabinets, or electrical fixtures.

The second type of contract is a "Cost of Construction Plus Contractors Fee" typically referred to as cost plus and is often used for more complex projects. With this type of contract the total cost is the actual cost of construction plus a percentage of that cost which is the contractor fee. The contractor fee is normally ten percent of the total cost.

So in summary, building your new home is not as complex as one might think.

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