When you are looking to build, the last thing you want standing between you and your dream home is a bank. New build construction loans can sometimes be difficult, but you do have options to get the money you need to build your next home.
Traditional Construction Loans
Before the recession, construction loans were a tool home builders used to finance subdivision build-outs or other construction projects. Periodically during the construction project, the builder would request a “draw” – funds paid out on the loan. Someone from the bank would come out to the construction site to make sure everything was on track and the funding was being used appropriately. Once the construction was complete, the buyer would obtain a traditional mortgage including enough money to pay the builder’s costs and close out the construction loan.
Traditional construction-only loans still exist, but today the applicant will usually be the buyer, not the builder. As a new home buyer, you will have to provide information about:
- A licensed general contractor who will do the work
- Floor plans and specifications about building materials (sometimes called a “blue book”)
- An appraisal of the estimated value of the home upon completion.
You will also be required to pay a large down payment – often 20-25%. During the construction process, you will only have to pay the interest on the loan. When the build is over, you will have to refinance the construction loan into a conventional loan. The high risk, double closing costs, strict lending requirements, and large down payment can make construction loans difficult for some borrowers. But there are other options out there.
Many lenders now offer a two-in-one mortgage option. With a construction-to-permanent loan, the lender advances construction costs, just like in a traditional construction loan. When the home is built, the same lender will automatically roll the loan balance over into a traditional mortgage. This is a popular option because:
- There is only one closing
- You only pay interest during the construction period
- You lock in your mortgage rate at the beginning of the process
Home Equity Line of Credit or Second Mortgage
If you own one home and are planning a new build construction, you may also be able to use your existing equity to pay the costs of construction. An experienced loan originator can help you explore options to take out a second mortgage or home equity line of credit on your existing property to pay for the construction costs. When the build is done and you are ready to move in, the sale of your previous home pays off the balance off the HELOC. This option can be helpful if you are downsizing, have high equity in your existing home, or don’t qualify for a traditional construction loan. However, you will have to pay into the principle on the HELOC during the construction process, so it may result in higher monthly obligations.
There are many options available to homeowners looking to build a new home. At First Securities Mortgage, our licensed loan originators will help you review your mortgage options to find a construction loan that works for you. Fill out an application to get started today.