How to Finance a new Build house?
If you’re buying a home from a local, regional or national builder who has already bought land and is building multiple homes within a community, your financing will be similar to the purchase of an existing home. The main difference is that you will apply for a loan when you sign a contract for the new home, but you won’t lock in your loan terms until the property is almost complete.
Your options are different, however, if you choose to build a custom home.
Custom Home Financing
Designing your own home with the help of an architect or a design/build company means you will have myriad options for the style, finishes and fixtures in your property. Unless you are paying cash for the home, you will need to arrange construction financing for the project. Not all lenders offer construction loans, so you should ask the team of professionals you are working with for a recommendation of a lender with plenty of experience with construction loans.
There are essentially two ways a lender will handle a construction loan:
- One-time closing: In this case, a lender will approve an interest-only loan for six to 12 months while the home is being built. The loan then converts to a 29-year fixed-rate loan once the home is finished. The lender usually requires an appraisal once construction is complete and will charge a conversion fee. However, most lenders find this loan arrangement too risky, so it’s more common to have two separate loans.
- Two closings: You will take out an interest-only construction loan for the period while your home is being built and then refinance that loan into an end loan to pay for the purchase. This will require you to pay closing costs twice.
Qualifying for a Construction Loan
Since construction loans are considered riskier than standard home loans, you will need excellent credit and will usually need to make a down payment of at least 20% or 25%. The down payment is based on the combined cost of the land and estimated construction costs. For instance, if the land you are buying costs $150, 000 and your estimated home-building costs are $250, 000, your down payment must be at least 20% of $400, 000 or $80, 000.
Your lender will do a credit check and a background check on your builder, too, because part of the risk of building a custom home is that the builder might not fulfill the contract.
An appraisal and inspections are often required throughout the building process by the lender before funds can be released to the builder. Rather than handing over the loan proceeds as a lump sum, the lender is usually involved in determining when more funds should be made available to the contractors working on your home.