So you want to build a new home, that is great news because building a new dream home can be one of the most exciting times of your life. But before you can build that home you will most likely need to arrange for financing, depending on the price and stage of construction you will have 3 options for financing your new construction home.
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Builder financing - When builder financing is used, the builders generally take out a line of credit with a bank or lending institution to construct the home. This is very common with spec homes, these are home that the builder starts without having a buyer yet. The builder will budget the cost of this financing into the final price of the home. As a buyer you will most likely just apply for a mortgage in the same manner that you would for a resale home except with one caveat. Depending on how far along the construction is, you might need to find a lender that has an extended rate lock in to guarantee a specific rate or depending on their guidance you may choose to wait and lock in later.
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The next 2 option are very similar with one difference, with a construction loan you take out the loan with the bank and make payments during the construction process. While you are making payment during the construction this will be a cheaper option in the long run as you will pay less for the house and it will also make your builder happy as they don't have to tie up their line of credit which will free them up to build more homes. With a construction loan there are 2 closings and this loan is usually suggested when you think that interest rates will be lower when the home is completed than when construction starts. The lower rate should outweigh the additional costs of closing twice.
The next option is called Construction to perm financing, this type of loan is similar to straight construction financing but you only close once prior to construction. This is a great option in a rising interest rate environment and since it only requires 1 closing you will save money on closings costs.
If you are considering building it is a good idea to start researching new home communities, builders and floor plans. The available type of financing will depend the builder and cost of the home, you will generally see new whomever 1 million and homes that are dirt starts will be more likely to require one of the construction loans.
Don't have a lender yet? We have 3 amazing lenders who can help make this dream come true.
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