For most individuals, unless you can pay for the home building project with cash, you'll need to acquire a Home Building Loan.
You will need permanent financing, which is something you have to pay off for about 15 to 30 years. There is a potential scenario where
you can potentially do away with the construction financing for those builders that build fast enough.
One example is a builder who lived in Oregon's built homes from start to finish in under two weeks allowing him to avoid the permanent financing option.
Before evening building the homes, they were pre-sales, and that means they were under contract. He was ready to complete the transaction before the
payment was even due!
For many builders, that won't be possible and so securing your financial option is an essential part of the process.
You will first need to qualify for permanent financing. To get the funding, you need to figure out what you can even afford to build.
This depends on the amount of disposable income you currently have. To put this in layman's terms, you need to figure out what house
payment you can afford.
Of course, you have to ensure that you have good credit and how much of a down payment you can afford to put down with any financing.
There are hundreds of sites to check out before meeting the lender. You can also check online to get a gauge of the information you need.
How to Prequalify for a Construction Loan
For those of you who don't understand the intricacies of a loan, the lender will crunch in formulas to see how much can afford
and then decide whether or not you prequalify.
However, each lender is different and has a unique set of rules to prequalify. Some of them are more strict than others.
What You Need to Know - Just like any lender, they want to know if you can repay the loan and successfully execute the construction
before locking in on the home building loan.
After you've been qualified for this financing, then you can move your way to the construction loan. You will also need to know
everything from appraisers and appraisals, to the cost of loans and different types of home construction loans.
So, where do you start? Well, for many of you, you may already have some connections with banks. If you've had prior experience with
home loans or home construction, there's a good chance you can start there.
One out of ten homes is owner built meaning that a lot of lenders are looking for people like you. Therefore you should be able to
find something that suits your needs.
Below we've listed a few potential sources to begin your search for a home building loan.
The easiest place to start is at your local commercial bank, pension fund, or credit union.
For veterans out there, there is a VA construction loan available, and the terms may be very favorable. You can simply
contact the local VA office.
For certain homes that fall under the FHA guidelines, you can get an FHA guaranteed loan. These are
specifically regulated by the Federal Housing Authority and are formally approved by the lending institutions involved. The lender,
backed by the FHA, who is also a part of the Department of Housing and Urban Development, feels much more secure.
With the FHA guaranteed loan, there is typically a lower down payment and interest rate. But there is a downside. For these loans,
there is a restriction on the maximum price for a home to build.
There is something called points, which are fees that will increase the overall yield of this loan. This makes it more appealing to
the lending institution who will eventually buy it from your lender.
There will also be a government inspector involved.
There are sites out there to help you prequalify to see whether or not you can potentially acquire an FHA loan, and then it'll help
you find an approved lender. Although it's primary purpose is to help with home purchases, many FHA loans help with home building.
Home Mortgage Loans
For certain unique cases, especially in the rural areas, people can get direct mortgage loans
if they qualify. This is under the Farmer's Home Administration and Rural Economic and Community Development. These loans are subsidized
by the government and sent to local offices every quarter.
The turnaround time is rather fast. The office is finished with the processing right after you apply before you have found a house.
Once you've been approved, you are notified when the money is available in your bank.
However, it does depend on your location. Sometimes the money can be made available immediately, while other times, there could be up to a
few months of wait time.
Private Lending Sources
You don't always have to go with the public institutional route. It may be easier to convince a
relative or close friend to loan you some money rather than going through a long, arduous process with a lender.
The trick is to offer a flat fee of interest rate for the money and make sure it's more than what they would be earning by
simply sitting in the CD or savings account.
After the house is completed, getting the requisite permanent financing should be a breeze because your abilities and experiences won't be considered.
Once the home is done, it guarantees a permanent loan which lasts about 30 years usually.
The Secondary Market There is a loan known as the Fannie Mae loan, which operates under the Federal National Mortgage Association.
This group is a stockholder-owned institution which works under the congressional charter.
This works because this intuition will buy your mortgage from a local bank and sell it off to an investor such as a labor union or insurance
company, essentially making this a secondary mortgage market.
A similar organization is called the Freddie Mack. The Federal Home Loan Mortgage Corporation runs this organization. Currently,
the Fannie Mae and Freddie Mack are operating with the FHFA or the Federal Housing Finance Agency, since the housing bubble collapsed in 2008.
Permanent Lending Options
When first starting with your lending options, you need to begin with permanent financing. We'll cover some of the most basic and common home loans out there.
The Standard Loan
For the standard loan, you can expect fixed mortgage payments ranging from 15 to 30 years. Also, the loan will be in accordance with about 80 to 90% of the total appraised value. For most lenders, you need to acquire a permanent loan before a construction loan.
The adjustable-rate mortgage can also be called Variable Rate Mortgage. Several features make this ARM very appealing.
Points essentially means a fee that you pay. Typically what this means is that you can pay a fee first to lower your total interest rate. This is usually paid in year one or year two. The purpose is to either save on interests or potentially even qualify for a bigger loan. But you will need the money to be able to pay this fee.
How Flexible the Rate is
One of the advantages of an ARM is the flexibility that it provides. This loan can be increased or decreased to balance the margin with the index or established economic barometers. If barometers go up, it assumes that you can pay for it. If it goes down, so make the monthly payments.
Additional Features of the ARM
We've listed a handful of terms that you should familiarize yourself with when searching for an adjustable-rate mortgage.
- Fix and ARM Annual Percentage Rate
- Adjustment Period
- Initial Payment With Discount
- Initial Payment with Discount
- Index Used and Current Rate
- Initial Fees or Charge
- Payment Caps
- How Long Will Discount Last?
- Negative Amortization
- Convertibility or Prepayment Privilege
- Interest Rate Caps: Overall? Periodic?
You should contact your mortgage broker to ask them about these terms and how it positively or negatively affects your adjustable-rate mortgage.
Roll Over Loan
For those that choose the public institution like a bank, credit union, savings loan, or something else, you should strongly consider a rollover loan. This loan means that your construction loan must turn into your permanent loan once the construction is finished. Most of it will be the same with slight variations. This is a big advantage for those who are financing with the rollover the loan.
Wrapping it Up
This was quite a lot of information to digest at once. There still needs to be more information on Construction loans. But now you know the basics of funding your home building project.