How to Finance a New Construction Home

If you’ve thought about buying a home, you may have considered the possibility of new construction. There are many benefits to living in a home that is brand new, and it is an attractive option for many buyers. One thing that often comes with buying is financing a house, and new home construction adds a few extra factors into the mix. It can be difficult for prospective buyers to understand the financing options for new home construction as they are different from financing an existing home. Below are a few tips to help you understand how new construction loans work.

Construction loans are often much shorter than mortgage loans and typically last about one year. The rates are normally higher than those of a mortgage loan. In order for a buyer to obtain a new construction loan, they will need to provide a lender with detailed plans, a construction time table and a budget that is realistic. Once the loan is taken out, the individual will be put on a bank draft schedule that follows the stages of the progress of their home. The process of construction project management is also a factor, as the lender will often send someone to check on the progress of the project. During the construction, the borrower often pays only interest payments.

Another factor of new home construction financing is the fundamental law of real estate: location, location, location. Approval, zoning, and everything in between will vary depending on the location. New home construction being built alongside existing real estate in La Mesa, California will almost certainly involve more upfront cost than an identical project occurring in Norman, Oklahoma. Those interested in going down the path of new home construction will need to consider this in order to prevent sticker shock.

Yet another factor of taking out a home construction loan is the qualification process itself. Like a traditional mortgage loan, individuals must be approved before they can obtain a loan, however, qualifying for a home construction loan can be a more difficult process. New construction is often viewed as a bigger risk through the bank because there is no existing home to act as collateral. Likely qualifications for a new construction loan include a low debt-to-income ratio, down payment of 20%, steady income, and a high credit score. In addition to these things, the lender will also require additional information about the project. They often need to know what materials are being used, what contractors will be working on the home and the planned size of the home.

Two main types of construction loans are construction-to-permanent loans and construction only loans. Under a construction-to-permanent loan, the buyer borrows money to pay for the construction costs of having the home built. After the completion of the project, the loan is turned into a permanent mortgage. For this type of loan, the borrower normally pays interest on the balance during construction and makes payments to cover interest and the principal after the loan is converted to a permanent mortgage. For a construction-only loan, the borrower takes out two loans. One for the cost of construction (normally 1 year or less), and a mortgage loan after they move in. This type of loan typically requires a lower down payment than a construction-to-permanent loan. This can be advantageous because it leaves the borrower with more money to pay the mortgage on the house once it is complete.

New construction is a great option for many buyers, but it is important to be informed of the loan process before making a decision. It’s a good idea to look into multiple lenders to review their requirements and rates. Doing your research can help ensure you make the right decision when buying a new construction home.


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