Thinking of Building a New Home?

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Building a new home has several advantages:

  • If you have not found the perfect house, you can design one and have it built to be just like you want it.
  • A new house is low maintenance; you can move in and enjoy it without having to worry about upkeep, repairs, etc… Many new homes include a warranty so you don’t have to worry about unexpected repairs.
  • New homes have the latest energy saving features to save you money on utilities costs.

Unless you are paying cash or using a builder that offers construction financing, building a house can involve multiple loans to get from start to finish.

  • Lot financing
  • Construction financing
  • Permanent financing

This can be a daunting task with many moving and complex parts. In my 20 years in construction lending I have financed hundreds of houses. I have assisted my clients from start to finish in building houses ranging from less than $100,000 to $1,000,000+. I have made loans for clients to buy, move and renovate 100+ year old historical houses and even financed the renovation of a 100 year old schoolhouse into a residence for a Hollywood videographer. I have financed all types of loans and have the experience to make the process as smooth as possible.

In this post I’ll touch on the basics, but there are too many variable and potential loan structures to cover everything. Feel free to call or email with questions you might have that are not addressed here.

Also, make sure you work with a Realtor through the process. They can provide a wealth of information as to what to expect your house to be valued in comparison to others in the neighborhood, what features will be best for resale, etc… They can also provide recommended builders that will do a great job for you!!

Lot financing can be the most difficult part of the equation to obtain. Most of the banks were financing too much lots and land when the recession hit back in 2007 and are still holding a high concentration of lot loans on the books. For this reason not many banks are making lot loans any more. However, I do have a couple lenders that are still loaning money to buy lots; but they will expect you to put down around 30% or more to get financed.

If you have already designed the house plans and have selected your builder prior to buying the lot, it is possible to close on the lot purchase and construction loan together so you only have the one loan. The bank will still look for you to have a reasonable amount of cash to put down. Most banks look for a 20% minimum down payment. Assuming the cost of the house is $200,000 your construction loan would be $160,000 and you would have a $40,000 cash down payment.  If you are taking out a loan down payment permanent loan such as FHA, VA or Conventional with 5% down, there are ways to minimize your construction loan down payment.

While the house is being built funds are advanced based on the construction progress. The bank will send out an inspector to see how much progress has been made. Assuming the progress is 25% towards completion the bank would then fund 25% of the remaining funds for construction to you to pay to the builder.

While the house is being built you pay interest only on what is advanced on the loan. Most banks require the interest to be paid monthly. During the early months of the construction loan the interest cost is very low because not much is advanced, and towards the end when it approaches being 100% funded, the interest bills are higher so make sure you budget for that.

When the house is complete you convert the loan over to a permanent mortgage loan. This will pay off the construction loan and you will have a long term mortgage loan. Rates can be locked in up to 60 days in advance so if rates are increasing, it can benefit you to lock in as early as possible when you know the completion date of the house.

Some lenders offer what is referred to as a ‘one-step’ construction-perm loan that allows you to close on your construction loan and mortgage loan at the same time. This product has been around for a long time and in my experience there are several factors that make it less attractive than getting separate construction loan and mortgage loans:

Myths of the ‘one-step’ construction to perm loan

  • You only have one closing – while the loan may close on both loans in one sitting, when construction is complete the home owner may still required to go back and sign a deed to convert the construction loan over to the mortgage loan.
  • Closing costs are lower because there is one closing – this also is not accurate. Typically the lender for a one-step construction perm loan will charge a 1.5% origination fee at the closing. When a mortgage loan is closed with Bank of England we do not charge a 1% origination fee so the buyer would be paying more by going with the one-step loan than if they had a construction loan with a 0.50% – 1.00% fee and a mortgage loan with no origination fee.

Also when you get separate construction and mortgage loans, we use the same closing agent for both loans to save money and get approximately the same amount of closing costs that a one-step loan would have.

  • Having only one closing makes the process easier. If you have any changes orders during construction, this is not the case. With the one-step loan you must not only get the bank to approve the change, but also the mortgage underwriters. This can delay the process and stop construction while you are waiting on the approval to be granted. With the separate construction loan, you only have to get bank approval which is usually a swift process.
  • It is a better loan because you are locking your rate at the closing of your construction loan.  I am told by lenders that do these loans frequently that commonly the permanent mortgage loans are locked in ARM (Adjustable Rate Mortgage) products, and the home owners then refinance their loan soon after construction is complete, thereby defeating the whole purpose of a one-step closing.  If you are considering this loan type, ask your lender what a 30 year fixed rate lock would be at time of construction loan closing.  You will find because of the length of time and potential delays that can arise during construction, locking a 30 year fixed rate that early will result in a much higher mortgage rate.

In summary building a house can be a challenging yet rewarding process. If you are considering doing so, having a lender that is very experienced in both construction lending and mortgage lending can help make the process easier and flow more smoothly so you can enjoy that new house!

We have numerous loan programs for our borrowers and we go the extra mile for our clients. Call now with any questions or a fast and free pre-qualification.

Mike Tarleton
Sr. Mortgage Loan Officer
Bank of England

5410 E. Hwy 30-A, Suite 212
Santa Rosa Beach, FL 32413

850-866-2963 (Cell)
706-888-0980 (Cell / Text)
866-727-8521 (Fax)

NMLS: 264821

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