TYPES OF NEW CONSTRUCTION LOANS

Building a new home can be a very exciting experience. Knowing the right questions to ask and what to expect can help remove some of the uncertainty about whether to move forward with new construction.

What types of loans are available for new construction?

There are two general categories: Construction Perm Loans and End Loans

CONSTRUCTION PERM LOANS

Construction Perm Loans are a type of loan where the Buyer first buys the lot from the Builder, then begins the building process. The Buyer is carrying the cost of building the house, and monthly payments begin immediately, increasing each time the Builder draws money from the bank, until the last draw when the loan is converted to a permanent loan at the fully amortized payment for the term of the loan.

Prior to the lot purchase, the plans for the house are decided, and an appraisal is done to determine the value of the home when built, to arrive at a final loan figure. There is generally room for overages in the loan amount.

The number of draws and the work that must be completed with each draw is noted on a Schedule given by the bank. The bank should send an inspector to verify that the work has been completed before the draw is given. The Buyer should sign off on each draw, along with the bank representative.

Types of Construction Perm Loans

Conventional financing is the only type of loan for construction perm. Expect a 20% down payment plus closing costs.

Who uses Construction Perm Loans?

Custom homes and homes built on the buyer's own lot are usually construction perm loans.

Pros and Cons of Construction Perm Loans

Pros ~  The Buyer actually owns the land and the house as it is built. They have more control in the building process and are free to ask the builder to make changes, since they are paying for everything. The house costs the buyer less because the builder is not paying to carry the house during the building process.

Cons ~ There have been instances when builders have taken draws and not finished the work. If subcontractors have not been paid, they file liens against the house that the owner is responsible for, even though the builder received the money.

END LOANS

End loans are a type of loan where the Buyer's loan takes effect at the end of the building process, when the closing takes place and the Buyer moves in. Most new construction loans are end loans.

Types of End Loans

End loans can be FHA, VA, USDA, or conventional. Expect a deposit of $5000 or more to begin construction on a new home, even if it will be refunded later in the case of VA or USDA financing. An experienced new home sales Realtor® can help you negotiate the deposit, especially if there are special circumstances.

Who uses End Loans?

Most Production Builders in new home communities use End Loans. They realize that the Buyer is more comfortable with this type of loan and they have more control over the building process.

Builders typically have relationships with preferred lenders, or their own in-house lenders. There will be special incentives to use their lender. TIP: Buyers can let builder's lender know they are getting quotes from other lenders to keep them competitive.

Pros and Cons of End Loans

Pros ~ The Buyer has more choice for loans. FHA and VA loans are end loans. USDA is also an end loan that qualifies in some circumstances. The Buyer has no responsibility for the house until it is finished.

Cons ~ The Builder owns the house and therefore has control over the house during the building process. The Buyer has limited or no input regarding changes in construction. In some instances, the Builder can void the contract with the Buyer and return their deposit monies if the Buyer is making demands the Builder does not want to meet.

If you are considering building a new home, we strongly recommend having an experienced new home sales Realtor® by your side during the process. They know the situations when builders will negotiate and can help you get the best deal on your brand new dream home.

Click here for our Series on Buying a New Home in Jacksonville Florida.