Loans for New Construction

If your home ownership dream is to have a home built rather than purchase an existing home, you will need to obtain slightly different financing to make that dream a reality. There are two ways you can finance the cost of building a new home- you can obtain financing through the building company or to obtain construction financing on your own.

Financing With Builders

If you know the company you want to work with during the construction of your new home, often times they have their own financing plans for buyers. You can negotiate a contract that is exactly the same as a conventional mortgage loan, only it includes the building of the home that you will purchase once complete, and close on the property after it is built in the same way that you would close on a home that is already built. In many cases, the builders will handle the financing of the home during the construction phase. They’ll handle all the costs associated with getting the house built and livable, and you’ll secure the mortgage once the home is completed and it’s time to move in. Normally, mortgages go through a rate lock period, where the interest rate is determined and locked in for 45 to 60 days until the home goes through the closing process and the deed is recorded. Obviously, it will take a contractor longer than 60 days to build a home from start to finish, so you’ll need a different arrangement to lock in your interest rates. Find out what happens if the builders take longer than expected, also, because there are almost always unforeseen delays when having a home built.

Obtaining Construction Financing

If you choose not to work with a construction company that offers financing, you can go out and get your own construction financing. When you go this route, you’ll need to purchase the land to build the home on, the construction of the dwelling, and probably pay to have all the utilities placed in the ground and brought to the home once it is built. (One of the advantages of going through the builders of the new home for financing is these costs are all included in the financing, and known prior to construction. When you finance on your own you may forget to include certain costs when obtaining financing). If you are going to be supplying all financing to the contractors to construct your home, you will need to obtain a loan prior to the closing on the home (unless you have enough money saved to handle the financing out of your bank account!) There are loans that offer low construction rates, but they are only effective for about a year- so it’s important that you find permanent financing that may offer a term up to 30 years, and a single closing so you are not paying additional fees to close more than once on the property as it is built and then when you take over the ownership of the home. Often, while the home is being built, your financing will only be charged interest. Then, once your home is complete, your payments will include principal and interest.