New Home Construction Loans, Explained
When it’s time to turn your homebuilding dreams into reality, it’s best to be as prepared as possible. The first step is knowing what types of home loans are available to you.
Making the decision to build a home is a big undertaking. But it’s likely a life decision you’ve been dreaming about, and planning for some time. When it’s time to turn your homebuilding dreams into reality, it’s best to be as prepared as possible, and know where to start.
The financing and application process for a construction loan is different than borrowing for a traditional mortgage. The down payment terms are more strict, so defining your budget and knowing what you can get approved for will help facilitate your experience.
TWO TYPES OF CONSTRUCTION LOANS
There are two types of construction loans available a construction-to-permanent loan and construction-only loans. Here’s how they work:
This type of loan (also known as “single-close” construction loans) covers the costs of construction on your future home, in phases, while it’s being built. Construction loans terms are short-term (generally a 1-year maximum).
The lender who approves you will pay your builder in installments during each phase of your construction process. These payments are called “draws.”
For example, if it takes $50,000 to complete the first phase of building your home, your payment will be toward that $50,000, and not the entire purchase price of your project.
The lender will usually perform progress inspections as funds are requested throughout the construction phases: for example, pouring the foundation, beginning framing, installing plumbing, and so on until your dream home is completely built.
Once your home is finished, and you move in, the construction-to-permanent loan rolls over into what will be the borrower’s mortgage. This allows you to only pay closing costs once.
NOTES & TIPS:
Expect to pay a 20% down payment toward the total cost of your project using a construction-to-permanent loan. You’ll get an estimated cost of your future home from your builder. There usually isn’t any wiggle room from lenders on this part of the deal, and they can potentially require even more.
With a construction-to-permanent loan, you’ll make interest-only payments during the construction phase, and will only pay interest on the loan amount required to complete that phase. Interest rates are always variable for that duration. They fluctuate with the prime rate.
A construction-only loan covers the construction of your home, in full, up front. The borrower pays the closing costs. When construction is finalized, the construction debt becomes your mortgage, which is considered a second loan, for which you pay closing costs a second time.
Construction-only loans are best for borrowers who have large cash reserves, or who want to shop permanent lender options while their home is being built. It’s also an option for people who will live in their current home while their new home is being built.
NOTES & TIPS:
A construction-only loan requires little or no money down, because your current home is used as collateral during the building phase. Your payments during construction are on your entire construction loan (not broken up in smaller loan amounts that cover each phase of the build).
When you borrow money to build a house, (unless you already own your land), there is no collateral in place. Your collateral will be your new home, once it is finished. Because of this, lenders must do a thorough inspection of your finances, and require additional information before lending the money.
Already owning your lot or acreage can serve as collateral, and potentially prevent higher down payments, and costs.
Let’s Get You Approved
Getting approved for a construction loan is more detailed than a traditional mortgage. Your lender will require certain details to be finalized before considering your application. These always include:
A contract from your desired builder
- Your home’s architectural plans (square footage, materials, etc.)
- Declared budget
- 20% down payment of your final project cost
What Your Loan Covers
- Lot (the land)
- Plans, permits, costs
- Labor and materials
- Closing costs
WHAT REINBRECHT WILL PROVIDE:
- Builder’s contract
- Architectural plans
- Builder’s Insurance
Get the home you dream of – not the home your contractor wants to build
Reinbrecht creates thorough architectural plans for our customers, ensuring you get the home you’re dreaming of – not the house we want to build. We work with our customers to understand their vision and help them choose the finishes and materials that suit their tastes before we ever begin construction.
When we’re finished and present the lender with your contract, you know the final price of your home. This is a major benefit to you – because, unless you have a change of heart after building begins, you never have to worry about being surprised with overages.
We know you’re excited to move into your new home. We’re excited for you, and it never hurts to have a ballpark estimate of when you can start living the dream.
30 – 60 Days: Home Selections & Construction Loan Approval / Closing
You can expect this to take anywhere from 30 – 60 days. Most are complete in 45 days.
4 – 6 months: Construction
Once everything is finalized and construction begins, it’s good to plan for another 6 months before your home is finished. After those 6 months, your home will generally be turn-key, and ready to be lived in. Start celebrating!
With detailed planning and a little patience, followed by some exciting decision-making, you’ll be home before you know it. Your dream life will be worth the wait!