Photo by Kelly Sikkema
Building a new home is an exciting way to find the perfect home for yourself. When you build, you can guarantee you’ll get the layout you want, with all the premium features you want to prioritize. Building also means not paying for the luxuries you don’t want. While building has its advantages, it can also be challenging. It’s a big undertaking, and you want to go into it with as much knowledge of the process as you can, so you can handle the twists and turns along the way.
Financing the construction of a new home is not quite as easy as getting a loan for an existing home. If you consider the lender’s perspective, it’s just a riskier investment to give a loan for a house that hasn’t been built yet.
First, gather your credit reports and other information. You’ll want to have documentation of your income, assets, and expenses. When determining your ability to pay back a loan, a lender is going to calculate your debt to income ratio. Familiarize yourself with what you make, spend, and owe in a given month. Then you can begin to figure out what you might be able to afford. There are a number of online mortgage calculators, which help you get a feel for what sort of price range you can expect, and you can experiment with different types of loan options.
Your builder can help with financing in a number of ways. Many builders have a list of preferred lenders they can put you in touch with. This is what Diyanni Homes does in Ohio. Other builders are directly associated with a specific lender. For example, Trophy Signature Homes, which sells new homes in the Dallas-Fort Worth area, is one of many Green Brick Partners around the country. DSLD Homes, a large home builder in the South, runs its own mortgage company which gives it more flexibility to offer financial incentives for working with them.
Construction loans are loans given specifically for building a home. Typically these loans have relatively high interest rates, but interest is the only thing you’ll be paying during the construction process after you pay a 20-25% down payment. That big down payment is the main thing you want to start saving up for if you’re thinking about building in the future.
One thing to keep in mind is that part of the cost of building a home is buying the land. Just like with the mortgage process, builders help you buy land in different ways. Blue Heron Signature Homes, a custom home builder in Raleigh NC, owns lots that you can buy with your home. This builder also builds in certain communities, where you would buy your lot from the developer. Other builders, like Insight Homes in Delaware, will have a process outlined for helping you buy land that meets your criteria.
The most common type of construction loan is categorized as construction-to-permanent, because it funds the construction of the home, and then turns into a permanent mortgage once you move in. This option is popular because it basically turns two loans into one; that means only one series of loan applications and closing costs. Getting two separate loans will likely cost you thousands in fees. Some experts suggest budgeting an extra 10% for cost overruns during construction. This cushion can help account for the variant interest rate for the first leg of the loan. Once the loan transitions to a traditional mortgage, a fixed rate will be set.
Building a home can be the best investment you make in your life. It can also be a long, stressful, and costly process. As a matter of fact, all of these things can end up being true. Depending on the project, you could have to wait between 6 months to over a year to move into your new home.
Building a home is a big decision and a big commitment, but there aren’t many things more rewarding than settling into the perfect home for you. What is the advice you like to give buyers on financing a new construction home? Especially first time builders?