Whether you're a first-time homebuyer or seasoned homeowner looking to build a dream home, becoming familiar with the latest financing options available will save you lots of time and future headaches.
Most likely, you will need to obtain both a construction loan and permanent mortgage to finance your new home, so it's best to analyze you financial situation before embarking on the building process. Start by asking lenders to explain the loan programs and qualifications they offer as particular qualifications and products often change. Also, obtain a copy of your credit report and work to wipe away any errors that could prevent you from obtaining the best rate and terms for your mortgage.
There are two types of loan options available for financing your custom project: a one-time closing loan and a construction-only loan. Taking the time to learn the benefits of each option and what best fits your budget will go a long way once the construction of your home begins.
One-Time Closing Loan
A one-time closing loan, also known as an "all-in-one construction loan" is a convenient and easy way to finance your custom project. This loan offers a short-term construction loan that becomes a long-term mortgage once the construction of your home is complete. Typically, the construction loan ranges from six to 12 months. This type of loan is attractive to many people as it reduces closing costs by combining separate loans and the lot into one convenient closing. On the other hand, the borrower does not get to shop around for the best rate before the construction loan becomes a mortgage. For those who choose this option, they may find the savings in closing costs and the confidence of a known-rate is a better option for their custom project.
This option does require to you to pay interest on a mortgage payment during the term of the construction loan. But this does vary from lender to lender so be sure to ask what your options are before making any decisions. A "draw schedule" will also be determined to pay the builders and contractors for tasks completed during various stages of the building process. Either you or the builder will fill out a form once a month that outlines the various stages of construction and calls for certain funds to be released to the builder once the items are completed.
Construction-only loan or Two-Time Close Construction Loan
Most builders can't wait until the construction of your home is complete to be reimbursed for the materials, labor and equipment they provide. Construction loans are offered to borrowers to provide a practical way to make payments on the construction of your home as various stages are completed. A construction-only loan is a short-term loan that usually ranges from six to 12 months and requires closing costs. This type of loan includes one closing at the start of construction and a second closing to refinance the construction loan into a permanent mortgage. Just like the construction-to-permanent loan, this loan requires you make interest-only payments to the lender during construction. This option is generally more expensive than construction-to-permanent loans, but there is more flexibility that may save you money over the life of the mortgage loan. With this type of loan, the borrower must apply for a long-term mortgage loan once the home is complete, which gives them the ability to shop around for a lower rate than is usually offered with construction-to-permanent loans.
Once you have met with several lenders, you should be pre-qualified for at least one mortgage. Some borrowers may be surprised to find out they qualify for a larger mortgage than they anticipated, while others may discover that their dream home is financially out of reach for a while. Just because you may qualify for a large sum of money doesn't mean you have to accept it all. Take the time to assess your comfort level before you determine the amount of money you would like to borrow. However, it is usually a good idea to borrow a little more than the estimated amount to build your home to ensure that you don't overrun the amount of your loan. If this happens you will need to refinance the loan and pay additional fees.
It's also recommended to save, save, save! In most cases you will be responsible for various costs associated with building your home before financing comes available such as a deposit on purchasing your building site, preparation of the plans and government building fees. These costs may be able to be reimbursed in your construction loan or considered a part of your down payment. Remember when you finally obtain financing, the first step in the home building process is over and construction is ready to go! Have fun and be patient, and in no time at all, you will be resting in your finished dream home!
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