New Home Construction: Loans and Financing

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While you may have visions of beautiful kitchens, luxurious master baths, and ample closet space in your head when shopping for a home, financing is an important consideration.

When you are looking for the perfect home, there are some key questions that you should ask.

  • Are my credit reports accurate and up-to-date?
  • What information do I need to finance my new house?
  • How much can I afford for a mortgage?
  • What are my options for a loan?
  • Where can I find out more information about a mortgage, and how do I shop for it?

Financing a new house is similar to obtaining a mortgage for a resale property. But there’s a big difference. You can also shop for rates and terms at banks, brokers, mortgage companies, lenders online, and mortgage brokers. Builders of newly built homes might offer attractive financing packages through an affiliate or mortgage subsidiary.

There are unique financing options available for new homes, but not for resale. These include bridge loans or new-construction financing. These loans can finance the purchase, construction, or sale of your existing home.

Each topic will cover in-depth, but first, there are some critical steps to follow to ensure you have all the necessary documentation and forms.

Get Ready

Once, someone said that success is when opportunity meets preparation. It doesn’t matter what type of lender you choose. It is vital to start planning well in advance. These key steps will make the application process easy and efficient.

Get your Credit Information

You should order your national credit files before buying a home. Best done by all three credit bureaus (Equifax/Experian/Trans Union). You should ensure that everything is correct and accurate information. Annual Credit Report allows you to access your files for free every year. It will help if you correct any errors immediately. Otherwise, the financing process will be delayed. You can also order your FICO credit scores at one or more bureaus. These will play an essential role in determining your lender’s terms.

If self-employed, lenders will require documentation about your income, employment, and two years’ worth of IRS filings. They also need bank accounts, 401(K), funds, and other assets. This information is essential before you start looking for financing options. It would help if you also had a rough idea about your household expenses. It will help you determine the mortgage you can get and the maximum house price you can finance.

Find out how much you can afford.

The checking calculator most builders, and lenders, provide on their websites can give you a good idea. In the past, simple rules such as “You can afford a home that is two-and-a-half times your gross annual income.” Today’s rules are more complicated. Lenders will take your basic information and use it to create automated underwriting models. These models combine credit scores, debt ratios, and other factors to determine loan sizes, fees, and rates.

Bottom line: Be open to trying different rates, down payment amounts, and loan terms (fixed-rate, 15-year, fixed-rate, adjustable_rate) to find out how your maximum mortgage amount changes and how it affects your price afford to buy a new home.

There are many types of loans.

There are many types of mortgage loans. These loans can be viewed in terms of their problem-solving capabilities.

FHA Loans

A federal government-backed loan may be the best option if you have little cash and a poor credit history. FHA loans (Federal Housing Administration) allow down payments as low as 3.5 percent and offer generous credit underwriting.

VA Loans

VA loans do not require a down payment. However, you must be a veteran to be eligible. USDA rural loans allow for zero down but are limited to small areas and may have income restrictions. There are some caveats. The FHA has recently increased its insurance fees, increasing your monthly payments. As well, the VA has increased its guarantee fees.

Conventional loans

These may be the best option if you have more than 10 percent, 20 percent, or both. Conventional loans can be sold to Fannie Mae or Freddie Mac, the government-chartered mega investors. Conventional underwriting rules can be more stringent, and banks may charge additional fees for loans. It will increase your cost. Low down payments below 10% may be possible, but these premiums are high for private mortgage insurance.

Construction loans for new homes

A construction loan can be helpful if you’re building your home as a general contractor or working alongside a custom builder. These loans with a lot of financing loans. Most new home construction loans are short-term funds that can finance the building phase of your project for six to twelve months. Then, you will convert it into a long-term loan with a 30- or 15-year term. It is known as a single-closing loan.

A two-closing loan is a loan that buyers take out to finance a house. They then close the loan when the house is. Then they apply for a loan for permanent financing. This option can be helpful in cases where construction costs exceed budget, but it is more costly due to two loan approvals.

The lending industry specializes in new-home construction loans. They are less readily available than standard mortgages. It is best to shop with local banks, particularly savings banks, that are familiar with the local market. However, some brokers advertise online and may be worth your consideration.

Draws

Any loan contract will include an installment schedule for drawdowns. A typical schedule would include a draw for site preparation and foundation, which could be 15 percent to 20% of the loan amount, followed by a draw for framing and plumbing. Over the remaining months for interior carpentry, appliance installation, or electrical system. The bank will send an inspector on-site to check the progress and determine if it complies with local building codes.

Construction Loan Down Payments

Banks that offer construction financing will want substantial down payments up front, usually between 20 and 25 percent. Some lenders offer specialized programs that allow you to link FHA-insured construction loans with permanent loans. Let’s say you want to build a house on land you own, and the property will be worth $400,000 when completed. A local bank may offer you a $300,000, nine-month loan to build the house. They will assume $100,000 for the land value and request an $80,000 (20%) down payment. This is based on the regular appraisal at completion. You would receive $300,000. Permanent loan at the end of the construction period.

Interest Rates

The “prime-plus,” short-term, construction-period section of the financing package will generally carry an interest rate. The prime short-term bank lending rate is 3.5% so a construction loan could be set at 4.25 to 4.5 percent. The package’s permanent 30-year and 15-year portions will generally be close to the rate of regular mortgages, typically 4.25 percent to 5.5% for a fixed 30-year loan. Rates for adjustable rate options, such as the famous “5/1″ARM, can be much lower. The rate is fixed for five years and can change each year after that.

Bridge Financing

You may also find the bridge loan” helpful. These short-term financings (of six to nine months) will help you get past a time crunch.

The lender may be a local bank or a subsidiary of your builder. They agree to advance money using the equity in your home as collateral.

Imagine that you are $50,000 short on the down payment required to purchase your new home. You have your current home for sale but no buyer. You have $250,000 of net equity and a minimal first mortgage. You could get $50,000 from a lender by placing a second mortgage on the current house or paying off the existing mortgage. A first-lien position is well-secured by equity. Part of the proceeds from the sale of your house will pay off the bridge loan.

Bridge loans are only short-term and can be problematic if your home isn’t sold within the agreed time frame. Bridge loans often have higher rates than regular mortgages and are usually at least 2 percentage points higher.

Builder Financing

Large- and medium-sized builders have wholly-owned mortgage subsidiaries or affiliate relationships with other mortgage companies. Builders can offer qualified buyers a variety of financing options.

A builder might also offer title insurance or settlement services. Sometimes, the financing package includes sales incentives such as price breaks and upgrades. You should carefully review the offer, as builders’ financing packages can have significant value. You should be aware that federal law permits and encourages consumers to search the market and choose any title insurance, mortgage, or settlement company they prefer.

The builder’s financing can reduce the time it takes to go from application to settlement. This is because the entire process is under his control. You may get a slight advantage in the approval of your financing application. It could also save you money on all the incentives that you are being offered (on the house and the closing costs).

However, you should compare the terms of the mortgage offered by the builder (interest rate, fees, and range of loan types) with those from other sources.

You can set yourself up for success.

Your records will be compiled in advance. You’ll have a better understanding of your credit score, and you will be able to find the best financing option. call to apply at (571) 544-6600.