Although
having the exact home you want is an outstanding benefit, financing home
construction can be a different matter. If you're working with a custom
builder, you will need to assume something known as a "construction
loan". This is the loan that pays off the builder while they build your
home. Construction loans are typically short term loans that pack a higher
interest rate than your traditional mortgage.
If
you're purchasing a starter home, this might thankfully not apply to you.
Builders of "starter homes" understand that a lot of their potential
buyers are not able to qualify for a high rate construction loan nor do they
understand or care to acquire a short term loan then a long term loan. For this
reason, entry-level homes are frequently financed by the builder or else the
builder merely builds the homes out of pocket, handling the lot and all of the
construction costs of the house. If this is the case with your builder, you
will need nothing more than a traditional loan.
If
it does turn out that you will require home construction
financing, it definitely pays to browse around for best rates and lender
with which to obtain one. As construction loans are generally fixed at a higher
rate than conventional home loans, you'll want to pay off the construction loan
as promptly as possible.
Some
banks will offer you a package deal called a "combination c and p"
loan with just one set of closing costs. This makes up both a construction loan
and a conventional mortgage loan wrapped up in to one. A combination C&P
loan will save you time and hassle in the long run.
Traditionally,
a construction loan works as follows. You apply through a lender for a
construction loan secured by the home that is being built. Because the home is
not yet built, the lender is taking on additional risk by financing you and
this will be reflected in your rates.
As
the house is constructed, the builder will ask for a "draw" or
percentage of the cost based upon the level of completion of the home. This
will come about at several stages during the construction of your new home. The
bank that's financing your construction loan will compensate the builder for
these draws and construction will progress to the next stage. Around
thirty days prior to the home being completed, you will want to apply for a
traditional mortgage subject
to the house being complete. This way, the construction loan is paid back and
the permanent financing is put in place as quickly as possible after the house
is built.
