Maybe the most daunting aspect of building a new home instead of buying a preexisting home is how and where to get financing. This is a general overview of a very complex process with more variables than can be added into one article. Hopefully this will give you a good idea of the general direction you need to go and then we recommend you find an expert that does construction financing to get you the best arrangement for you.
How construction loans differ from ordinary mortgages?
A construction loan is temporary. As you build your home, the bank funds to draw requests and you make interest only payments on the construction loan as the house is being built. Construction loans come with a designated build time, usually 9-18 months. That’s your window to finish your construction. If you go over, you will wind up paying penalties to the bank. That window starts the moment you close on the construction loan, even if you’re not ready to start building.
When you get a construction loan, you have to close for the construction side, which means paying fees. Then when you finish the home and get your certificate of occupancy, you will need to close again when the loan is refinanced from a construction loan into permanent financing. That means two closings, and two sets of fees for closing.
It is more difficult to find and to qualify for construction loans than ordinary mortgages. You may qualify for a $600,000 mortgage, but be denied for that amount as a construction loan. There are also many programs that help you put less than 20% down with a traditional mortgage. Whereas, you will nearly always need 20% down for a construction loan. All of this might seem overwhelming, and for many people who have thought about building the financing aspect is often what scares them away. So let me explain the two major ways we accomplish financing that helps people get through this very complex part of building.
1. One-time Close Construction Loan
This loan is a hybrid construction/mortgage. We recommend a lender that lets you have some of the best features of a construction & traditional mortgage all in one loan.
- One-time close means you only pay fees to close one time, up front. At the end of the construction phase your loan rolls over into traditional mortgage.
- You lock in your interest rate up front. This means you don’t have to risk rates going up as you build and paying more interest for your mortgage than you plan up front.
- We always have you opt for the 18 month build window. Normally it does not take this long to build. But an 18 month period gives you time to fully finish construction, receive your certificate of occupancy, and if needed, sell your old home without having to rush into rolling the loan over into permanent financing.
- Your one-time construction loan can include the purchase of the lot for your home, and even landscaping.
- You still need 20% down on the One-time construction loans.
- Finding them. These types of loans are rare and difficult to find sometimes. We refer to one lender in particular for this kind of loan.
- Qualifying. These loans sometimes require more for qualification.
2. We Finance Your Construction
This is where you give us a down payment and we get a construction loan, pay for the home, and you close on the house at the end with a traditional mortgage.
- You don’t need 20% down, normally we can do it for 10%.
- You only close once, at the end of the construction of your home.
- You only need to qualify for a traditional mortgage and not a construction loan.
- We purchase the lot and roll it into your mortgage.
- You have to pay at least 10% down. (usually taking out an equity line of credit with your bank is a good solution).
- You have to be able to qualify for the traditional mortgage at the end of construction or else you will lose your 10% down.
- You don’t know what interest rates will be like in 10 or 12 months once we complete construction. They may go up, thus increasing the monthly payment because of added interest…which in worst case scenarios could mean you are no longer approved for the amount you were earlier when the rates were lower.
- If you currently have a home that you need to sell in order to qualify for another mortgage, then during construction you need to sell that home. That brings up the problem of where you will live between closing on the sale of your home and the completion and closing on the purchase of your new home. It also brings up the issue of how quickly you can sell your old home. You’ll need to have it sold before we finish construction.
In reality, financing, even on traditional mortgages is never easy. Financing construction can be more difficult. But like anything else, if you are smart and creative and show some determination, it can be done. We have a lot of experience helping people finance the homes they build with us. We have in-house experts that can answer your questions and assess your unique situation to tell you if there is financing that would work for you.
Feel free to reach out to us with questions. Sales@coagent.yourwayhome.com Or call 720-600-0540