Many adults have been through the home loan process at least once in their lifetime – and although it is not the easiest process, it is one which we are familiar with. For those looking to build a new home instead of purchasing resale, however, is the process different? Here is some information you may need if you will be looking to obtain a new construction loan for your home.
First and foremost, understand that the loan process will always require you to have your financial ducks in a row.
This means that if you know that you will be applying for a new construction loan in the near future, you should make sure that your credit is as clean as possible, and that your credit score is sufficient to make a major purchase. In fact, you really need close to pristine credit. If you default on a conventional loan, they can repossess the home. If you default on a construction loan, the bank is stuck with a half-built home. Therefore criteria are generally much more stringent.
Because lenders look at debt-to-income ratios when deciding if you qualify, you’ll want to make sure that you do not have too much outstanding, unpaid debt. New construction loans can be more difficult to obtain, usually requiring more time and patience – and a lot of documentation! Here are some additional facts to know:
- A new construction loan is typically repaid within a year, and is also structured as a variable rate loan, subject to fluctuations in the prime rate.
- You will be required to provide a much higher minimum down payment than with a normal resale. The bank may require as much as 30% down.
- Before beginning the quest for financing, it is advantageous to select your local new home builder. Because it is more difficult to find a willing new construction lender, you may be able to utilize a connection your builder already has – but be sure to check rates and make sure they are in line with the industry.
- Try credit unions or savings and loan associations if you are having trouble finding a lender at traditional banks. Whoever you choose, make sure they have experience with construction loans, as the process can be more complicated.
Your Builder’s Role
Your lender will require you to provide what is commonly known as the “loan story”. This is essentially a comprehensive plan detailing the construction project, and is supplied by your builder.
The lender will want to see your construction contract, the specific building plans and the project’s cost estimate. They will also want to see the size of the home, the materials which will be used, and all the contractors. The money they lend you will cover the costs of materials and labor, as well as permits, fees and architectural plans.
Specific costs are segmented by the builder into distinct work periods. This is because the lender will not give the entirety of the loan up-front. Instead, they release portions of the loan at specific points in the construction process, after the completed work is verified. Typically, the builder is paid monthly as the project progresses, and the lender inspects the job along the way. The money is distributed to the builder directly from the lender.
You will complete your new construction loan and begin a traditional mortgage before you take possession of the home. Some lenders will allow the homeowner to roll the construction loan into your mortgage loan, eliminating two sets of closing costs. These are known as construction to permanent loans, with long-term interest rates locked in at closing.
If you are ready to build your new home, call Lindahl Construction. We have the expertise and experience to guide you through the entire new home building process – from drawing up blueprints to handing over your keys.