Have you ever thought of constructing your own home rather than buying an existing house?
There are many advantages to owning a brand new house, for example, higher energy efficiency, lesser repair costs and the opportunity to customize things as per your preference. There is tranquillity in constructing a home. Not just you, but the other members of the house can customize their room according to their liking. You might think building a house is a very lengthy and complicated process, but it is not. With the advancement of time and technology, the construction of a home has become quite more natural. However, the first thing needed to construct a house is a home construction loan.
The first or the initial step of constructing a house is similar to buying an existing home. Here are the steps that you need to follow if you are interested in building your own house.
- Meeting a lender who would give you a pre-approved amount which you can afford;
- Developing a wish list and this includes the features and location;
- Visiting the communities of builders and subdivisions that fall within your price range.
These are the initial steps that you are required to follow before building your own house.
Buying within a development
If you are buying a house from a builder who constructs multiple dwellings along with similar development, then the total financial process would be the same as buying an existing home. In most of the cases, the builders will show you the path through which you can find someone to finance your dream house. However, you need to make sure that the offers are reasonable and within your limit.
There is a difference between such an arrangement and conventional loans. Here, you apply for a loan and sign a contract with the builder, but the financing of the property comes from the builder’s preferred lender or one of their in-house mortgage companies.
Buying a custom built house
If you want to build your own house with your design, then you will have many more options for financing, but more steps need that needs to be followed. A single mistake can cause you a considerable loss of money and time. So, unless you have cash ready at hand, you need to arrange for a construction loan. The construction loans are not as available as the regular home loans, so you have to look around and do some legwork.
There are a few lenders who provide a one-time close loan. The single-close loan incorporates the cost of construction to one loan and only close on the mortgage once the building is complete. The best thing about this loan is that you just need to pay the closing cost once. However, some of the lenders follow a two-time close process. In a two-time close program, you pay the interest only on the interim loan. You then refinance the loan and convert it to a permanent mortgage once the construction is complete.
Strong credit requirement
There is a high risk in construction loans. You are going to need a higher credit score along with a substantial down payment of at least 10 to 20 percent if you’re getting conventional financing. The down payment requirement is determined by the total price of the land and the considered construction. If you already have the property, then you can utilize it as equity for the construction loan. Unless you’re getting an FHA construction one-time close loan that only requires 3.5% down payment, be prepared to come up with extra cash for down payment.
The lender you are borrowing money from will check your credit as well as the credentials of the builders. It is imperative that you have a near perfect credit score if you are planning to get qualified for taking such loan.
Other funding sources
If you have equity in the home you are living then the lender can offer a bridge loan to use while your new house is being constructed and waiting for the selling of your current home.
A lot of people think this a good option for buyers, but in reality, this arrangement can be costly and risky. There is another way, and you can move into a temporary house while your new home is under construction.
These are some of the things that you need to keep in mind while getting a construction loan to build your new home.