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.
OPTION #1:
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.
OPTION #2:
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’re looking to buy a new home, you may have considered purchasing a brand-new home, rather than one that has already been built. There are many benefits to buying a new construction home, but there are also many factors to consider when you are making your choice. If you are looking to buy a new home, these tips can help you make the right home purchase decision for you.
Get pre-qualified – Whether you’re purchasing a custom-designed home for you and your family, or a home in a newly-constructed subdivision, you will need to make sure you have been pre-qualified for a mortgage. This will help you save time, and make sure that the home you’re building, or the homes you want to look at, are within your price range. Your lender will also be able to put you in touch with a qualified real estate agent to help you during the next step in the process.
Make sure it’s really what you want – As with any major life decision, it’s important not to rush into buying a new home. Weigh the pros and cons of buying new construction versus buying an existing home. For example, if the new development is farther away from the city, will this affect your commute? Do you like the way that modern construction looks? If you have a view, will it still be there in 5 years? Are you comfortable with the extra work that may be involved in landscaping a newly built home? These are all important factors to consider when deciding whether buying new construction is right for you.
Do your research – Before making any commitments, it’s important to research the builder that is building your potential new home. Know their reputation and ask for client references. Visit other communities that they have built in. Research the neighborhood too; drive around, visit model houses, research zoning laws, and talk to locals. Your real estate agent will be able to provide you with insight into the neighborhood(s) you are interested in as well, and will have other recommendations.
Ask about the HOA – If the subdivision you’re looking at has a homeowners’ association (HOA), you will want to ask the builder for the HOA’s Declaration of Covenants, Conditions, and Restrictions (CC&Rs). This will tell you about things that the HOA may or may not allow in the neighborhood – and some of those things may be a deal-breaker for you. Additionally, find out what the HOA dues are, and when you are expected to start paying them.
Buying a new construction home can be a great investment. Your home’s design and layout will be new and up-to-date, and you will have some say in the home’s design, the fixtures, and the overall look of the house, to help make it more “yours.” But it’s important to make sure that you know everything associated with buying a new home before you make the decision. If you have more questions about buying a new construction home, contact one of our licensed Mortgage Loan Originators. If you are ready to begin the home buying process, click here to get started!
