In the current real estate market, new listings are being sold are record speeds for record prices. This rush to find the perfect home only to lose it in bidding war can become discouraging for many buyers. The interest in finding a home that fits their exact wants and needs is a big requirement for buyers also. This desire will naturally lead them down the path of being interested in building their own home. By building their home, they don’t have to get into a bidding war for the house and they can make the house the way they want from the beginning. Many buyers don’t know where to start when looking into building their own home or how the loan works for the construction. Below I have outlined a few common questions I get in regards to construction loans and the process associated.
Do I need to buy a lot to build on? And how does the financing for the lot fit with the construction loan?
In order to build a custom home the buyer will need to have purchased a lot or a piece of land to build the home on. This lot can be a large piece of land out in the country or in a new build subdivision that is often already being developed by a home building company. There may be restrictions on who the prospective home buyer can have build on that lot if it is within a newly developed neighborhood. The development company may require the buyer to use their services for the new build. Otherwise, if you choose to build on a piece of land out in the country, you have full rights to the property therefore you can choose whoever you want to build your home. The financing for a new lot purchase can be built into the total construction loan and if you already own and have financing in the place on the lot, the new construction loan will absorb the financing currently in place for that piece of property.
Once I choose a builder I want to work with, how do I go about getting the loan for the construction?
You will want to research and meet with several builders before you choose one. Once you have decided on a builder, you will need to provide the lender with plans, specs, costs, and a contract with the builder for the entire scope of the project. The bank will then do a “subject to” appraisal, stating that “subject to the completion of the house” based on the plans/specs/etc. the house will be valued at “$XXX,XXX”. The loan for the construction is then based off of this information. Each lender has their own minimum down payment requirements. State Bank can help with a construction loan with as little as 5% down.
We then process the loan as a normal transaction taking about 30-40 days to complete. During this time we have established a draw schedule with the builder so they can get paid as they work on building the house. As the homeowner you will have full control of when the draws get paid out based on your satisfaction with the builder. As mentioned earlier, hopefully you have met with several builders before hand and are confident and comfortable with your choice. When we close the loan after the 30 days of processing, the build can take 6-9months depending on the size and scope of the home. This timeframe will have been determined before processing and during initial discussions with the builder.
Are there other forms of construction loans?
The other type of construction financing is called “End Financing” or an “End Loan”. This takes place when a homebuyer partners with an existing homebuilder who may be at the beginning or middle of a new build and agrees to sell the house to the homebuyer upon completion. The builder will carry the financing for the new build and will usually contract with the homebuyer on fixtures and other finishing details of the home. Once the house is completed, the buyer simply purchases it like they would any other home. The bank has no draws and does not need any plans for the home because the bank sees this transaction as an everyday purchase deal. This type of home building is beneficial to the homebuyer because they don’t need to go through the hassle of being so involved in the home build or dealing with a true construction loan where draws and timetables need to be met. The buyer can simply purchase their dream home directly from the builder ready to go. The builder might often provide their own loan options for the consumer or special financing terms for the buyer, but the cost is usually much higher than what a community lender can provide.
These are just a few of the common questions I get when approached about construction loans. Building a home doesn’t have to be intimidating. But buyers must know what they are getting themselves into. It’s not that much different from any other loan process just a few extra hurdles and pieces of paperwork.
Please do not hesitate to contact me with any questions you, a friend, family member, neighbor, co-worker might have on new build financing, purchasing an existing home, or refinancing their current property.
Zach is a Mortgage Advisor with State Bank in Dublin, OH. He writes and speaks regularly on the mortgage industry, personal finance, business development, and leadership. His focused approach on educating clients through the mortgage process allows him to help hundreds of new homeowners each year.
Learn more about Zach at www.mortgagecoachzach.com, find him on instagram @mortgagecoachzach, or call/text him at 740-398-4917.