Congratulations! You’ve made the decision to build your new home, located where it will be, selected your builder and finalized your new home plans…but wait a minute! How are you going to pay for it?! While sometimes a last-minute thought, a new construction loan is an essential tool for building your new home.
New construction financing differs from a traditional mortgage loan in that something that does not yet exist needs to be financed. The most popular approach to new construction financing today is the use of a Construction-Permanent Loan, which offers the following features:
One loan for both the construction phase and the permanent financing
Only one set of documentation and closing costs for both phases
Ability to lock in interest rate at beginning of project
Checkpoints at time of each draw
Interest only monthly payments on balance advanced to the builder
At completion/occupancy the construction loan converts to the mortgage loan
Available with a variety of downpayment options, loan programs and extended rate lock options
Not all lenders offer new construction financing, so it is important to select a lender that not only offers this option, but is experienced with new home financing and has the expertise to guide you thru the financing process, which can at times seem complicated, confusing and overwhelming. Your builder will very likely be able to introduce you to a new construction financing expert. Some questions to ask include:
Am I able to lock my interest rate now so I know what it will be when my new home is complete?
Is the interest rate the same for both the construction period and the mortgage loan?
How long do my builder and I have to complete the new home?
Will I need one or two loans to build my new home?
Are downpayment requirements different for new construction financing?
What kind of payments do I make during the construction period?
What if the house comes in under budget? How about if it comes in over budget?
It will take several months to build your new home. Be sure that you ask a lot of questions up front, and that you like the people that you will be working with…because you’ll be working very closely together for an extended period of time. Investing time at the beginning of the project to address questions and options will help to ensure a smooth and enjoyable experience while building your new home. Clear and consistent communication between you, your builder and your lender will help to ensure that you’re building your dream home and not working thru a nightmare.
David Kuiper, Vice President of Mortgage Lending is a new construction financing expert with Northpointe Bank in Holland, MI and is actively involved with the Lakeshore Home Builders Association. David can be reached at 616-726-5583 or firstname.lastname@example.org.