15 Jan Getting a Home Construction Loan the Smart Way
Getting a Home Construction Loan the Smart Way
Do you have a vision for your dream home? Most people do, but often it’s difficult to find an existing house that fulfills it. You should consider new construction to get exactly what you want. We know that this sounds intimidating, but it’s best to start at the beginning and take it one step at a time. The very first step is to set your budget and secure financing. Be sure to speak to multiple lenders to find the best rate and terms for you. It is very important to get information from multiple sources, as their available construction loans can vary widely.
New Construction Loan FAQ
Let’s talk about financing construction, which is different than getting a typical mortgage loan. This information was compiled with a little help from Bankrate.com
A new construction loan can cover the cost of land, labor, building materials, needed permits and more. It can even be used to cover landscaping costs and installed fixtures and appliances. It will not cover furnishings and some appliances.
There is a down payment required for most construction loans of 20 to 30 percent. You’ll find more information about putting up collateral for this down payment below.
Yes. Though the best construction loans offer a fixed interest rate, many do not. Some lenders offer only loans with variable interest rates that fluctuate up and down with prime. Plus, the rates are typically much higher than those you get on a mortgage loan. This is because for a mortgage the home itself guarantees the loan, but banks consider construction loans as a bigger risk because there is often no real collateral.
A construction loan is generally a short-term loan. You have to submit a construction timeline to the lender with detailed plans and a realistic budget. The payments on a construction loan are dependent on the completion of the project.
If your loan is approved, the lender will pay your contractors as needed, instead of giving you a lump sum. During construction of your new home, the lender will send out someone to inspect the progress of the house’s construction at various stages. If the progress meets expectations, the lender will make additional payments to the contractor. This payment is known as a draw.
While under construction, most lenders will only require borrowers to repay interest on funds drawn to date. This lasts until construction is complete. Upon completion of your new home, borrowers may be able to convert their construction loan to a traditional mortgage. However, some loans do not offer that option. In those cases borrowers will be required to obtain a separate mortgage to pay off the construction loan.
Making a Down Payment on a Construction Loan
Most construction loans require a down payment of 20% to 30% of the total loan amount. Of course, you can make this down payment in cash, but often that amount of cash is difficult to have on-hand. Don’t worry, there are some other options.
Using Land as Collateral
Another option for securing a loan for constriction is to use land as collateral. If you own your land outright, it can be used to secure a loan with perhaps a better interest rate. Or you can use your equity as a down payment.
How much you’re able to borrow against your land depends on a few factors that include: the value of your land, the sales price of the home you plan on building, your credit score and credit history, and loan programs for which you qualify.
Using Your Existing Home’s Equity
Because you need to live somewhere while your new home is under construction, chances are you still own a home. If you have equity in or full-ownership of your current home, you may be able to use it to get your construction loan. This can be a great option for anyone ready to scale-down, as they head into retirement.
Finding a Lender
Not every lender will have loans available for a construction project. Columbia Home Solutions can recommend a couple of area banks through which a construction loan may be secured. The Bank of Greene County will work with you to find the right type of loan for your project. You can also check with M & T Bank for lending options that involve the use of land or other property as collateral.
New Construction with Columbia Home Solutions
Consulting with Columbia Home Solutions can take some of the worry out of the whole process of building your new home. With a variety of stock plans from which you can choose and modification options available, we can help you estimate the budget from the start. Many floor plans can be found on our website, or feel free to contact us for further insight.