For those of you that are visiting for the first time, we discussed choosing a program to build your new home, or being the General Contractor on the previous page. Now we are moving forward discussing home construction loans that will finance your dream home. Go have a look at New Home Construction and come back here we have much to discuss.
Ok everybody is back, and we have decided to move forward and build you dream home. What's next you ask? Finding the money, and that is usually in the form of a home construction loan.
You may have chosen one of the Owner Builder programs and they provide financing in the program (they really don't, the bank does, but it is part of the package deal) and you are wondering why do I need to research financing? Remember what we discussed about Research on the Pre-Construction page? Well, for the sake of the folks that may have not reviewed the pre-construction page, or this is your first time to the site here goes. We always research to make sure we get the best deal for us. Most of you are probably just like me, your home is your single biggest investment, and to just accept what somebody tells you is not wise. OK, now you got me started again!
When I built my home finding the money seemed to be the most daunting task of all. I searched and searched, called, looked, and did my research. The main thing that I want to emphasize is slow down take your time, and do what is right for you, your family, and your situation. Nobody knows your financial situation any better than you. Don't let anybody tell you how to proceed, YOU DECIDE.
Building your own home is a process, part of that process is finding the money, and unless you got a rich uncle, it is probably going to be in the form of a construction loan. So let's explore our options.
Let's start at the beginning you know the logical way(there he goes again with the logic stuff). What are you going to need to build a house on, help me out here, yes, land. Ok, land, if you own it is good collateral for any loan, you can't burn it, steal it, and it is virtually indestructible. No kidding the banks love the stuff. If you don't own it, you are going to need it to build your house.
Now if you are considering building, you probably have a good idea where you want to build. I really need to talk to you about how to find land and the considerations when you build your own home. Go have look at the Buying Land page and then come back here.
Let's talk New Home Construction Loans. Finally we get to what we really need! Money to build! You could essentially have four loans before it is all done. Oh my gosh that sounds nuts now doesn't it? You heard right! You could have a land loan, a home construction loan, a bridge loan and a mortgage loan. Ouch! That sounds complicated! It really isn't, let's break it down.
If you are considering buying land then waiting a while to build, and don't have the cash to fork over, you need a land loan. They are straightforward and just about any credible bank or lending institution will offer a program. Many people do in fact buy their land and pay it out then proceed to the home construction phase. It offers them a chance to build up some equity in the property to apply to their new home construction and this puts them in a more favorable light when applying for the new home construction loan.
The plus in this approach is you take your time and build up equity by paying for your land then when you are ready you build. The minus is it takes a while and you have to wait to build. Also if the mortgage rates turn against you, time may not be on your side.
Now let's talk about the new home construction loan. This is a loan that has a time limit of 6 to 12 months. In other words you get approved for your loan and as soon as you take a draw the clock starts ticking. You must finish in the time allotted or you have to make arrangements to secure additional financing until you can close. Once you have your construction loan, you will have a draw schedule for getting the money you need to buy materials and pay contractors. One note to the wise, if they offer a 6, 9, or 12 month construction loan with the same terms take the longer one, it gives you more flexibility.
The draw schedule will vary some from lender to lender but it is set up to pay you on completion of parts of your home construction project. For example the first draw may be site prep and foundation. The Draw Schedule follows the home construction project from beginning to end. The lender will send inspectors to make sure you are at the stage you say you are before giving you any more money. The inspector fills out a form and rates your progress, takes pictures and then you get the next draw upon request. Generally, the Lender opens a checking account in your name and transfers money into it and you use that to build with.
Now let's talk about a bridge loan. If you have a home now and have considerable equity, a Bridge Loan allows you access to the equity while you still live in your home. You can take your equity and use it as a down payment on a Construction to Permanent Loan.
The Construction to permanent is a new home construction loan that does one very good thing for you the builder of your dream home. It allows you to close one time. What is so great about that you say? You only pay one set of closing cost, which can be a considerable amount. Remember what we talked about earlier (for those of you that read the Pre-Construction page) the Owner Builder programs say they save you so much money that the additional closing costs are insignificant. I don't find several thousand dollars insignificant by any means, do you?
Another thing I would like to take a moment to discuss is PMI Private Mortgage Insurance. You can only borrow up to 80% of the value of the home you are going to build. This is an important point because PMI is expensive. PMI insures the bank is paid, if you default. In other words they want you to have enough skin in the game so you don't walk away easily leaving them holding the bag. The good thing about building your own home is you cut out the middleman the builder and that saves you enough to get out of the PMI program, which by the way, is a monthly fee on top of your mortgage until it is paid out.
A few words on the final mortgage are in order here. Generally the new home construction lender will pre-qualify you for the permanent, or final mortgage. If you use a different construction loan lender than you permanent mortgage company you can get in trouble if you do not get pre-approved for you permanent mortgage. How do you ask? Good question, let's say you are building and you lose you job or you get a divorce or get ill and cannot work or many other things that effect your credit and you have not been approved for your permanent mortgage, this could lead to no place to live. This brings up another good point.
What do you not do when you are building your home? Anything that will adversely effect your credit, such as getting a divorce, buying a new car on credit (or anything else that effects your credit score), co-signing any loan, Changing jobs, quitting your job, paying your bills late etc... Remember you need to have the same or better credit score when you started the construction, when you are ready to close on the permanent mortgage.
Let me sum up. You must do what? Research your options. Those that fail to prepare, prepare to fail. However you decide to build your home with whatever program or service you need to research your financing option and decided what new home construction loan fits you and your situation best.
The best place to start is to get the mortgage companies coming to you to try and get your business. Use the mortgage search services listed below. They are all Free and take about five minutes to get several responses from each of them. Choose the lender that suits you best. After they respond it will take you some time to make a good decision so get started now it is never to early. One more thing to note is these search services show mortgage or refinance options. Fill out the form which takes a couple of minutes for the mortgage option. Many of the companies that respond will offer several different programs including new construction, construction to permanent loans, or land loans. The mortgage search services generally limit the options on their forms in order not to confuse or discourage people. They represent many lenders and offer a good resource. What a deal! They have money and you need money, everybody wins.
