Building a home of your own is an exciting journey, but there are so many questions to be answered. Where do we start? Who should we choose? And most importantly – how are we going to pay for it?
A new home will most likely be one of the biggest investments you will make in your lifetime. Before any of the excavation begins, it’s important to consider what you can afford and how you are going to finance the build.
Let’s discuss how to get started with a lender and the different types of loans that are available to homeowners.
While some people do pay with cash up front, most homeowners choose to finance their home through a loan. If you’re planning on utilizing a loan, one of the first steps you should consider taking when exploring your building options is speaking to a lender.
If you don’t already have a trusted lender in mind – ask your builder for a list of lenders they use and or trust. Lenders have a variety of programs and some may work better for you than others.
Once you sit down with a lender, they’ll look at a few important financial elements to determine your eligibility. Typically, lenders will look at your credit score, your employment status, other sources of income, and existing debt obligations. These factors help the lender assess your background and to develop a secure financial plan. After the review, the lender will provide you with a pre-qualification letter for a certain loan amount.
There are a variety of different loan types available so it is important to determine which type of loan will work best for you. There are loan programs for rural areas, first-time home buyers, programs for veterans, etc. Keep in mind that in most instances, a mortgage amount will be tied to an appraisal of your home to be built. Since the home is not yet built at the time of the appraisal, they will need to use the detailed construction plans and building specifications to aid in the appraisal process.
Most builders will choose to use either a construction loan or finance it themselves. Before making a choice, it is important to weigh the pros and cons of both options.
A Construction Loan is a short-term loan used to cover the costs of building your home. The build follows a draw schedule where the lender pays the money in stages. Draws typically occur at larger milestones such as foundation, framing, etc. One of the nice features of the construction loan is that you typically only pay interest on the portion of the loan proceeds that have been distributed to the builder as progress on the home occurs. Fine Line Homes uses a construction loan program – one of the major benefits is that the house price is locked in once construction starts. Material and labor costs are always fluctuating and some builders may pass along those increases after construction starts. When utilizing a construction loan with Fine Line Homes, your contracted price is protected once the home is started. This provides additional financial security preventing you from worrying about surprise increases throughout the build. After the home is complete, the construction loan is converted to an end loan where you start paying principal and interest on a monthly basis. Depending upon the lender and the type of construction loan, some convert automatically while others might require a second loan settlement to convert to a permanent loan.
Some builders may not require a construction loan but rather will finance the build themselves during the construction period. You would obtain permanent financing through a conventional loan at the end of construction and settle on the home upon its completion. The builder will usually require you to show proof of qualification for the purchase amount. Also, since you are technically not financially invested in the build until it is complete, Home Builders will often require you to pay a large non-refundable sum upfront as a deposit to ensure your commitment to the project. Another effect of not paying on the home until it’s complete is that the pricing can change throughout the build and those adjustments are often passed on to you as the buyer. Additionally, if the interest rates are 4% at the beginning of your build and 6% at the end – you’ll be stuck paying that extra 2% in interest that you didn’t plan for.
If you’re looking to really customize your home to your wants & needs, financing through the builder may not be the best option for you. The financial uncertainty can cause the builder to be more cautious with any customizations.
If you are a Veteran, you also have the option of a VA loan. VA loans are short-term loans offered to veterans, active military, & their spouses to build a new home. These loans work very similar to a construction loan. If you are looking into this option, make sure to check that your builder is able to work with this type of loan.
There’s a lot involved with building a home – but it doesn’t have to be stressful. Our team at Fine Line Homes is here to help you through every step of the build – including financing with either a construction loan or a VA loan. If you are starting to explore your financial options, feel free to reach out to one of our New Home Experts for a list of trusted lenders in your area!