The process of building a home is very different than buying an existing home (to say the least), and many people are understandably confused by the financing aspect — new construction loans work a little bit differently than loans for existing properties, but that doesn’t mean they’re out of your reach (or that buying an existing home is your only option).
The main point I want to get across about new construction loans is this:
Don’t let the added complexity of getting a construction loan deter you from looking into building over buying.
Look, I get it—buying has a few advantages over building. You get to move in right away (the whole process is obviously faster), and, well…
Honestly, that’s kind of it.
People will tell you that buying an existing home is cheaper than building a home (and frankly, if keeping things cheap is how you look at home buying, you might want to shy away from building a new home). Maybe that’s true on the front end—it may look like you’re saving money over building a new home.
But are you?
Older homes have problems, many of them hidden. Even a home that’s only a couple years old may have a few surprises for you that end up costing you down the line.
And I don’t mean costing you down the line as in “Oh no, now I have to replace this—now everything’s better!” I mean costing you down the line as in “Oh, now I’m going to have to constantly repair this and deal with the fallout of this terrible installation for the rest of the life of this house.”
When you’re building a house, even though you wait a bit longer, you have infinitely more control over what you’re ultimately building.
You also have more agency in terms of making sure your house is built well, that it isn’t going to have problems down the line.
And even if it does, well… you know exactly who to talk to about it, now don’t you?
Which makes the slight added complexity of dealing with new construction loans look not so bad after all. And long term, you may end up saving more money than you’d save up front by buying an existing home.
Ok, rant over — let’s talk about your loan options.
New Construction Loans — How Do They Work?
Basically, you have 2 options, and the two options depend a lot on you, rather than the builder. They depend on your financial situation, your preference, and your comfort level, both with the amounts involved, the loaning institution, and the builder.
Option 1 — In-House Financing
In-House financing basically means that your design-build firm is carrying the loan for you until the home is completed.
It works something like this — the design-build firm you’ve selected already has a financial institution (or several) with whom they work and have a relationship. Your firm takes a look at your financials and then works out a monthly payment you can afford and a down payment that works for you.
That construction loan finances the construction of your new house, and, once the house is complete, the loan is converted to a mortgage and transferred to you.
The advantage of this generally is that you need a much smaller down payment.
Because the firm is taking on the loan for you with a loan institution they have a relationship with, the firm generally is able to either a) have a lower down payment required by the loan institution or b) cover a portion of that large down payment for you and work out a down payment and a monthly payment schedule that works better for you.
This does require a certain level of trust with your builder, but to be honest, if a design-build firm is able to offer this option at all, they’re probably doing pretty well for themselves — this can be a big differentiator between the real professionals and the other guys, because a firm needs some serious financial strength to be able to offer this option.
Finally, in-house financing may allow you to get a better rate than you’d be able to get on your own.
In fact, in-house financing may even allow you to get a loan you wouldn’t otherwise be approved for.
In fact, we’ve had some clients who were turned down for a loan by one of the institutions we work with — but when we went in on their behalf, we were able to secure the loan for them and start the building process.
Option 2 — You Carry the Loan
Option 2 is that you get the construction loan yourself. Once construction is complete, that loan is converted into a mortgage, but this is something that you work out with your lending institution separately from your builder.
Some people are more comfortable with this option, but this generally means you’re putting up a large down payment, something like 15%–20% of the loan. Not everyone has $25,000 lying around to make such a large payment up front. (or $50,000, or $100,000… you get the idea).
New Construction Loans — Choose the Loan That Works Best for You
Every new construction loan is ultimately determined by your individual needs. New construction loans can be fraught with confusion for clients, which is why we help them through the process.
If you want to learn more about the process and what we can do for you in terms of securing a loan, click the button to contact us today.
We can’t wait to talk to you!