What To Know Before You Break Ground
Building your own home, Just the way you want it
What if you could custom order your next home, with every nook and cranny built exactly to your specifications? It’s often a homebuyer’s dream.
Building a new home gave Matt and Marissa Dickerson the opportunity to check everything off of their wish list. For them that meant five bedrooms, four and a half bathrooms and an open-concept living area on the first floor. We decided, ‘Hey, we have the budget and we have the time, let’s build it out and get it exactly how we want it,'” says Matt, 29, who lives with his wife in Fulshear, Texas.
Building a house is a very different process from buying an existing home, and it’s not for the faint of heart. Here’s what you should know before you throw your hardhat into the home-construction ring.
How To Get A Land Loan
If youd like to get a land loan, its typically easiest to do so from a community bank or credit union located near the land youre looking to buy. But depending on what you intend to use the land for, there can be other loan options available to borrowers. For example, if youre planning to build a primary residence in a rural area, you can apply for USDA loans. USDA loans and USDA construction loans are designed for low to moderate income families and have a repayment term of 2 years. They have low interest rates, and depending on the situation, borrowers may qualify for a loan with no down payment. On the other hand, if youd like to use a land loan for commercial purposes, you can apply for SBA 504 loans. SBA loans are provided by the U.S. Small Business Administration and designed for businessowners looking for funds to help contribute to the cost of the land purchase. The interest rates and terms of SBA loans can vary, but the repayment period typically lasts 10 20 years.
The right home is out there.
Find it online at RocketHomes.com.
What You Need Before Trying To Get Barndominium Financing
Avoid going in to see a lender with your plans just drawn on a sheet of paper. If you cant afford an architect. there are several websites that specialize in barndominium blueprints, like Barndominiumdesigns.com.
If nothing else, invest in some good home design software a program that will render detailed 3D drawings and itemized building supply lists. There are several on Amazon, but they dont allow you to return them if youre dissatisfied or the learning curve proves to be too steep. This one has both a free trial and a money back guarantee. Combine its output with any visuals provided by the company erecting your shell.
In any event, whether you design the plans by yourself or do so with the help of professionals, youll bring them along with a detailed materials list and a credible building timeline to your initial meeting with a lender.
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Is It Hard To Get A Loan For A Pole Barn House
In some cases, you may face some obstacles getting financing for a pole barn house. One of the reasons for this is that they are not as common as conventionally built homes so lenders may have some concerns or may be unfamiliar with them. Finding a lender that frequently finances pole barn houses may help you void any unwanted speedbumps. If you work with the right lender and have the right information ready, applying for pole barn financing should not be any more complicated than traditional home financing.Try interviewing multiple lenders. See if they have ever previously financed a post-frame house or give out construction loans. A lot of banks dont give residential construction loans out anymore because of the 2008 financial crisis. Also, avoid lenders who have separate residential construction and mortgage departments. Calculate the cost of your entire project. Include land, utilities, site work, framing, and finish. If you go to a lender with a thorough plan, they are more likely to finance your project. They dont want to take on a risky loan. Show your lender floor plans and elevation drawings. Really walk them through exactly what you want to build. If they can visualize the project in their mind, it will make more sense to them, and they will be more likely to fund it.
However, most banks just dont want to finance pole barn homes. However, they may be able to offer you another type of loan that can fund your project.
How Can I Get A Home Construction Loan
Qualifying for a home construction loan can include strict requirements because the asset in this case the finished home doesnt yet exist. As with a mortgage, youll likely need to pay closing costs for your home construction loan. Lenders will evaluate your loan application based on a number of factors, one being your credit profile.
Lenders look for good credit and a healthy debt-to-income ratio, which is the total of your monthly debt payments divided by your gross monthly income.
Because lenders may have strict underwriting criteria for a home construction loan, its important to check your credit before you apply. You also may need a hefty down payment, typically at least 20%, though this will vary based on your specific situation. Even if not required, it could be beneficial to make a larger down payment as a part of negotiating terms.
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Taking Precautions Against Property Damage
An important step in the process is ensuring that the builder is covered by Contractors All Risk Insurance Cover, which protects the builder, the bank and the borrower against any loss or damage that may occur during the construction period. These may include fire, lightning, explosion, earthquake and storm damage, as well as the theft of building materials.
If the builder has his own policy, the bank requires a copy of the full policy wording as well as proof of South African Special Risk Insurance Association cover.
Once the building is complete, it is recommended that you obtain home insurance, as the builders insurance will only cover damage that occurs during construction.
How Much Down Payment Do I Need
- Sales price is calculated based on the cost of the land/lot plus the cost of construction
- If the property has been owned for more than 12 months, the fair market value may be used to calculate total purchase price
- The end or “as constructed value” of the home may be greater than the sales price calculated for down payment
- Any funds used towards construction such as architectural plans, building permits, cash used to purchase the lot, etc. may be included as part of the down payment talk with a Mortgage Loan Officer for more details.
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Loans To Buy Vacant Land Or A Lot
Ready to buy a homesite, but not quite ready to build your new home? Many buyers are looking for or already have found the ideal lot or vacant property for building their future home, but need to wait before they start construction. Life and financial situations can play a big part in whether someone is ready to start building a home from the ground up, and for some the time is not right to take on the task. If that is your situation, you likely will want to consider some form of lot loan or land loan to make your vacant property purchase first. And later, when youre actually ready to build a home on your lot, you can consider your construction loan options.
A lot or land loan allows you to secure your ideal homesite so you can continue to get ready to build your home. Borrowers can use the time after they close to plan their new home and its design. If they havent partnered with anyone yet, then some will use this time period to find their ideal home builder. And maybe this time allows you to settle into a new job or your children to graduate from college.
Home Construction Loan Rates And Requirements
Lenders are wary when it comes to construction loans, so expect to put in more work before you can secure financing for your new home. Construction loans are usually issued by banks rather than mortgage lending companies. Working with your bank can expedite the process of loan approval.
Typical Construction Loan Requirements
- Down payment of 20%
- Construction plan and schedule
You should have a credit score of 680 or higher when you apply for a home construction loan. Since there’s no physical house available for collateral with a construction loan, excellent credit is key. Many lenders also require a 20% down payment for a construction loan, and no lender will approve a loan unless they’re confident the borrower can make the monthly interest payments during construction.
In addition to a solid credit history and reliable income, the lender will need to know the specifics of your construction project. Before you can secure a loan, youll need to offer details such as who will do the work, the size of the house, and the materials you’ll use. Work with a general contractor to gather this information before taking it to the bank.
Because of the riskier nature of construction loans, their interest rates usually run slightly higher than those for a standard mortgage. However, that doesnt mean you cant find competitive rates. Your credit score, debt-to-income ratio and the location of your new home are all factors that will help you qualify for a lower rate..
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What Documents Youll Need To Provide The Lender For A Construction Loan
Just like when you procure financing for purchasing a traditional loan, there are several documents youll need to provide the lender to get a mortgage. The resource covers the financial information youll need to disclose, but the lending institution will also require the following as well:
- A building contract between yourself and the builder or contractor .
- Copy of the builders/contractors license.
- A set of blueprints of the house you are building.
- Detailed specifications on how the home is being built things like the type of heating, plumbing, electrical, kitchen, baths, etc.
- Any quotes outside the building contract, such as swimming pools, sheds, landscaping, etc.
- If you are purchasing land as part of the construction loan, the lender will require a land survey. You might have an acre of land or 5 acres. The lender will want to know exactly what they are lending on.
- A breakdown of the cost of construction.
It should be noted that as part of the process of approving your construction loan request, the lender will do a home appraisal to make sure of the market value. Like any other mortgage, the lender wants to make sure they are lending on the appropriate amount.
How To Qualify For A Construction Loan
If youre applying for a construction loan, be prepared for a lender to scrutinize your finances even more closely than if you applied for a conventional mortgage. Here are some tips:
- Review your credit score. Youll want it to be at least 700 .
- Cut your debt-to-income ratio as much as possible. Examine your other debts car payment, student loans, credit card debts and any other borrowing expenses to make sure that your DTI ratio is below 40 percent.
- Be prepared to hand over a sizable down payment. While traditional mortgages might allow borrowers to put down 5 percent, most lenders will want to see you cover between 20 percent and 25 percent of the costs with a construction loan.
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Buying From A New Home Builder
Buying a home already under construction from a new home builder is an option for those who wish to buy a brand new house, but dont want to go through the motions of planning and construction themselves. This is common when a new neighborhood or housing community is in the midst of being built. Essentially, youll be able to have some say in how the house is going to look, but will be doing a lot less of the grunt work. Youll still have other responsibilities, such as picking the lot you want to purchase, choosing the layout and the finishes, and what additions to install if any.
Just the same as purchasing a vacant lot, selecting a qualified builder is also important for both your finances and the future of your new home. Make sure that your builder has a good reputation for constructing quality homes. Any legitimate builder will also provide you with a warranty, usually for one year, for their work and the building materials used during the homes construction. Once you have the warranty, read it carefully so you know exactly what parts of your house it covers. And, with that warranty, most contractors will include a homeowners manual so that you can keep up with the basic maintenance of your new home in the years to come.
Want to compare the price of buying a house to building one from the ground up?Check out the cost of homes in your city.
Should I Invest All Of My Savings Into Vacant Land
If youre planning to build on land you already own then you can put all of your savings into the land and build.
This is because you can increase the land value by investing more on it and take out a land equity construction loan when you build.
If youre buying land and you have no intention to build within 12 months of settlement, it may be a better option to hold onto your savings since they are much easier to access than .
When , you need to meet the following requirements to ensure youll be able to access the equity at a later stage:
- Location: Its important to that is either in a major city or town or at least close to one.
- Services: The land must be connected to the electricity grid and have access to town water or tank water as well as sewerage services.
- Size: The land must be no larger than 50 hectares only a few lenders will consider land sizes larger than this.
- Access: There needs to be easy access to the land via a road. As long as its well maintained, dirt roads are usually ok.
Disclaimer:The above must not be taken as financial advice. Please speak with a professional financial advisor before you make a decision.
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Two Closings One Loan Its That Simple
Luckily for you, PrimeLending can help with this complicated process. We offer a streamlined two-step construction loan process. First, you get a temporary loan to start the project. Second, once construction is complete, well refinance your initial loan into a traditional mortgage at the most favorable terms possible. Here are just a few benefits that we provide to make the process smoother:
- Well lock the interest rate for your second refinance loan up to 12 months. This protects you against rate increases, and the lock fee will be refunded when the loan closes.
- Your first loan will come with a fixed rate and you only pay interest on money used for construction, not the entire loan amount.
- When you refinance your initial loan to your regular home mortgage, youll receive closing cost credits that may result in low or no cost refinancing.
How To Finance A Custom Home Build
If you are in the market to build a custom home , its likely that youve owned a home before and will therefore be somewhat familiar with the home loan process. However, there are a few notable differences between purchasing an existing home and financing the construction of a custom home. This post will address the three main financing components to consider:
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How Much Does A Home Construction Loan Cost
Expect to pay more for construction financing than you would for a traditional home loan even if the cost to build or buy is virtually the same.
New home construction loans cost more for a couple reasons:
- More risk Lenders take on a bigger risk because the construction process includes more variables. And, the home being used as collateral for the loan amount does not yet exist. This risk translates into higher interest rates compared to standard mortgages
- More paperwork Money is disbursed at different points in the construction process, and the lender has to verify enough work has been completed to justify the next draw of funds
Lenders also require lien waivers proving builders have paid their subcontractors before issuing draws.
Draws can be done in stages, for example, a lender might divide the project into seven stages and release money at each stage. Or they may allow builders to request money based on the percentage of completion.
In general, the more draws allowed, the nicer it is for the builder. However, every draw adds to your costs because of the admin work involved.
Is it cheaper to buy or to build a home?
The idea of building a new home might scare you because you believe its the pricier option. But, depending on location and home features, the cost of building a house is comparable to buying an existing home.
The average new home costs $296,652 to build, according to the National Association of Home Builders 2020 study.