New Home Construction Loans
Are New Home Construction Loans Difficult To Obtain?
You know you’re ready for a new home. But should you buy an existing one or build from scratch? New home construction loans make the prospect of building a new house more attractive.
Buying an existing property is obviously more convenient. And it may be ‘cheaper’ too. If you decide to build, you’ll have to go through more steps in the process. You need to find land with access to water, sewage and septic systems. You’ll need permits. You need to hire more people.
But building a new home has its unique advantages. You get to choose the home that you really want. You can avoid toxic materials and health hazards.
You can build it so that it is more energy-efficient. It’s good for the planet and your long-term savings. These are factors you cannot control when buying an older house or even a new house.
The upfront cost can be higher but over time, it may be easier to get a return on your investment. You’ll also likely need fewer renovations and repairs, so that also saves you time and money.
When building a home, it is important to work with a reputable contractor. You should be aligned on cost-saving measures that won’t compromise quality.
You should also have a good contract that covers construction duration. This helps you avoid budget overruns. This is particularly important if you are obtaining a new home construction loan.
Securing Loans For New Home Construction
Loans for new home construction are loans specific to new home builders. These loans have a shorter term and are usually based on the home’s projected value.
This loan is not paid out in a lump sum. Instead, lenders pay out the money in tranches as construction progresses.
An advantage of this type of loan is that you only have to pay the interest during construction. You’ll start paying on the principal amount once construction is completed. This gives you more flexibility to save or use your money for other expenses. The higher level of scrutiny required to get approval also helps keep the project on track.
How Do New Home Construction Loans Work?
In a new homeowner’s loan, the mortgage company covers the full cost of the home. In a new home construction loan, the money is paid out to the contractor in installments or ‘draws.’ Before paying out the next draw, the lender will inspect the project to ensure that it is moving along according to the agreed-upon timeline.
This loan covers work and materials for new home building projects. You can use the loan amount to pay for anything building-related. These include labor, permits, and interior finishing, among others.
Down the line, you’ll need furniture and appliances for your new home. These, however, cannot be bought from your construction loan money.
To qualify for a construction loan, you’ll need to present tax returns and bank statements. You’ll also need to present the project plan and contract with the builder. A lender will look at your debt-to-income ratio.
You need to have a good to excellent credit score. As in buying a new home, you must also have cash on hand for a down payment and unforeseen expenses.
A Construction Loan For A New Home Can Be A Construction-To-Permanent Loan
In this case, you are loaned money for the construction. Once it is complete, the loan becomes a mortgage.
A construction-only loan gives you the money you need to complete the project. Afterward, you can pay in full or get a mortgage for permanent financing.