Home Construction Financing 101
Building a new home is an ambitious, complex, and exciting undertaking. If you’ve decided that’s the best solution to your housing needs, securing the right construction financing is a critical step. We have some suggestions that may help.
First, though, three tips to keep in mind throughout the home-building process, from planning through completion:
- Ask questions. It’s your home and it’s your money, so ask away, whether you’re talking with a mortgage banker, a building designer, a contractor, an inspector, or someone else involved with the project.
- Take notes. When you’re talking with a lot of people—and that’s the nature of home building—it’s easy to forget who said what. Use the note system most comfortable for you—paper, digital, or recorded—and be sure to note the date and names of those present.
- Don’t rush or allow yourself to be rushed. Deadlines need to be taken seriously, but rushing into hasty decisions can be a big mistake.
Now, here are a few home construction financing basics:
Your mortgage banker is your new best friend
- Your loan officer should be an experienced construction financing professional, like the mortgage bankers at Sente Mortgage.
- Most people who decide to build a home have a general idea of what they can afford. A mortgage banker begins with that idea and fleshes it out with up-to-date information about your assets and obligations, so you have a realistic number to start building a budget.
- A detailed budget is essential for a smooth-running home construction project. Your loan officer will be familiar with local construction costs and can help you get started.
- Your mortgage banker can get you pre-qualified and pre-approved for a loan and can describe the various financing options available to you.
- It’s likely you’ve already been doing a lot of dreaming—browsing neighborhoods and websites, even visiting open houses to help picture your new home.
- While your home will be uniquely your own, it will share many features with other houses: roof, exterior/interior finishes (walls, trim, countertops, etc.), doors, windows, flooring, cabinetry, utilities, appliances, etc. During the “dreaming” phase, make note of the styles you like, and explore their costs.
- Also note your architectural preferences.
- Make a notebook of photos that you can show to your architect/designer.
- Make sure your must-have list is complete.
Before construction begins
- You will need a building site, a set of approved plans, a construction loan, and a place to live while construction is underway.
- In addition to your mortgage banker, you will need a real estate agent (to help you sell your current home, if needed, and/or buy a building site), a pre-purchased set of plans and/or an architect/designer, and a contractor. Ask for recommendations from people you trust, and interview at least three professionals in each category before you select one. (It takes a little time, but you will learn something valuable with each interview.)
- Review contracts very carefully.
- You will need to work closely with your designer to make sure your plans do not exceed the limits of your budget. It’s rare for a home construction project to come in under budget; there are often surprises along the way that increase building costs. Plan accordingly.
- Your home plans should detail all aspects of construction, from the foundation up, including materials, appliances, fixtures, utility connections, and finishes.
Your construction loan
- Once you have a lot picked out and your plans meet your needs and have been approved by local agencies, your mortgage lender will arrange for an appraisal and handle the “paperwork” for your loan.
- You will be expected to make a down payment, including some closing costs, before construction begins. The amount will vary depending on your loan.
- During construction, as loan funds are drawn and distributed to the builder, you will make interest-only payments on the loan.
- Once construction is complete and the final inspection and appraisal accepted, you will switch to a permanent mortgage (typically 15 to 30 years).
- Your mortgage banker will explain the process to be sure there are no surprises.
If your next home is your dream home, the loan officers at Sente Mortgage would love to help you make your dreams come true. Give us a call today.
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