Are you interested in building a new home? Are you curious as to how you finance the building of a new residential property? If so, we have your answers.
There are two options to build a new home. Option 1 is to find a builder who has a subdivision, where they build the home and you obtain the financing and close when the home is completed. Option 2 is to find a piece of property, choose a builder, and close on both the lot and construction right at the beginning. Let us explain in further detail these two options for financing a new construction home.
This option is the easiest way to build a new home, as you just need to find a builder who carries the cost of construction. You (the buyer) will go to closing once the construction is complete. This allows you to obtain regular financing such as a Conventional or FHA /VA* loan (certain restrictions apply). During this process, the build time can vary from three to nine months, so an extended rate lock program is best. An extended rate lock program allows you to lock in your rate at the initial contract ratification for a longer-than-normal time period, which allows your house to be built and secures your interest rate. This way, you know the interest rate and monthly payment and can prepare accordingly. If you don’t take advantage of the extended rate lock, then you are ‘floating’ the rate, which means the rate can fluctuate. This could be risky as interest rates could increase. Building a home this way allows you the chance for lower down payment options and lower credit score program availability.
This option for building a home is to fund the lot and construction with one loan. This is often referred to as a Construction to Permanent loan. This option tends to be a little more expensive than option #1. However, often you will get a custom home that is worth more than you have spent. With this kind of financing, one should be looking at a one-time close program. This means that when you close, the first disbursement of funds is to purchase the lot. After that, the builder you choose will take disbursements as the home is built. Once completed, the permanent loan begins. The rate during construction and the permanent rate can vary. Historically, this kind of financing would have been done with two different transactions; the construction financing, then the permanent. With the one-time close, you can reduce your costs since there is only one loan closing.
Now that we have gone over the different options, hopefully you have a better understanding of the financing of new construction home building.
If you have any questions about new construction financing, contact one of our licensed mortgage professionals. If you are ready to start the home building process, click here to get started!