Planning to build a new home? Here are 5 tips to prepare you for financing your new home construction project.
5 Tips for Financing a New Home Construction Project
Building a new home is an exciting process — you get to create the ideal home for you and your family — but securing financing for a home that does not exist yet is a little more complicated than your standard mortgage loan. These 5 tips will help you get financing ready for your new home building project.
#1 Explore Financing a New Home with a Construction Loan
A construction loan is a short term financing option designed for homeowners in the home building process. It is meant to cover the costs of construction and is usually capped at a year-long term. Banks have to assume more risk with construction loans since the collateral does not exist yet, so these loans typically come with higher qualification requirements and variable rates.
Once the build is complete, you can refinance your construction loan into a 15-year or 30-year fixed mortgage, or take out a new loan to pay off the initial one, called an end loan.
#2 Understand that Financing a New Home is More Complex than a Standard Mortgage
Construction loans are very different from your standard mortgage, so the process for applying and qualifying for one is also more complicated. Before approaching a bank for a construction loan, you will need to develop a detailed building plan with a qualified builder and make sure you have enough saved for a substantial down payment.
Develop a Comprehensive Building Plan
Most construction loan applications for financing a new home will require information from you and your builder about your home building plan. To start, you will need to provide your lender with a project timeline and a realistic budget. You will also need a comprehensive list of construction details, including floor plans, building materials, and details like dimensions and ceiling heights. Your home builder should be able to help you create an accurate estimate and itemized list.
Expect a Higher Down Payment
The down payment for a construction loan is much higher than a typical mortgage — generally 20-25%. This is because construction loans are considered higher risk, and your bank wants to make sure you are motivated to complete the project.
#3 Shop Around for New Construction Loans
A new home construction loan is helpful to get through the building stage of the process and can be rolled into a more permanent long-term loan once the home is complete. This loan is known as a single-closing loan, but there is another loan type that might be worth considering.
With a two-closing loan, you will take out a construction financing loan and close it when the home build is complete, then apply for a new mortgage for the long-term. The additional approval and closing processes are an extra expense, but two-closing loans can be helpful if your home build exceeds the projected budget.
Shop around at local lending institutions before settling on your best option for financing a new home. Although they are not as common as standard mortgage loans, you may have luck finding construction loans at lower rates at your local savings banks and thrift institutions.
#4 Consider Builder’s Financing for a New Home
Your custom home builder may offer their own financing that is more affordable or flexible than options offered by your lending institution. Through a partnership with a lender, builders can carry the financing of a new home build until the project is complete, after which you’ll enter into your long-term mortgage loan.
Builder financing may include incentives like package pricing, project upgrades, lower rates, or a more flexible timeline. It can also speed up the home build since you won’t have to wait for lender approval, go through an underwriting process, or other qualifying hoops. Keep in mind that, since the builder must assume some risk of the loan agreement, they will have their own qualifications that may be higher than the bank’s.
#5 Buy Land Upfront to Simplify Financing a New Home
Before you can apply for a construction loan, you will need to decide where to build your home. If you do not already own the lot, you may be able to include the cost of the property in the construction loan. However, to simplify the process of financing a new home, try to buy the land upfront. This will reduce the down payment needed to qualify for the loan and help you get started on the build that much faster.
Buying the land upfront also means you can take your time choosing the ideal lot for your new home. After all, you can change as much as you like about your home during the build, but the location, views, and amenities of your homesite have to feel like the perfect fit.
Financing a new home can be complicated, but choosing the spot for your next home doesn’t have to be. At Stage Pass, our homesites offer the best amenities and views with convenient access to the bustling towns of Jacksonville and Medford. We can also help you find the right financing option to make your home building process simpler and more rewarding. Reach out to our team to learn more.
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