When it comes to financing a new build, it’s important to proactive. Begin preparing well in advance of applying for financing. Wise buyers review credit history and scores from all three primary credit bureaus (Trans Union, Equifax, and Experian) to ensure credit history is accurate. Individuals can obtain credit information for free once per year by requesting an Annual Credit Report. It’s vital that potential buyers correct any credit error prior to applying for financing. Otherwise, you risk delaying the entire process. It’s also a good idea to obtain your FICO credit score from at least one credit bureau because that score plays a determinant role in lending terms offered.
Lenders will also require documentation of employment, income, 2 years of tax returns, and documentation of bank balances, retirement funds, and any other assets. It’s also a good idea to have a solid understanding of current monthly expenses because this impacts the amount of mortgage you can afford, and subsequently, the price of the home you have the ability to finance.
Once you’ve established your expenses, it’s easier to use the general calculators available on lending websites to determine what is most affordable for you. As a general rule, most buyers can afford a home that costs 2 to 2.5 times their gross annual income. However, lenders will usually enter an applicant’s basic information into an automated underwriting model that considers the ratio of debt to income, credit scores, and other factors to determine appropriate loan size and interest rates.
Homeowners have several options when financing a new home, and we work with a variety of financing products including VA, FHA, and conventional loans. However, in today’s marketplace, the majority of home construction is financed using a construction-to-permanent loan. These loans offer competitive rates, flexible terms, and quick closings, making them the most popular choice for new home financing. Construction-to-Perm Loans combine construction and mortgage financing into a single loan that requires only one closing, saving both time and the additional costs related to a second closing. Interest is charged only on funds used until the home is completed. Generally, the construction-to-permanent loans provide the short-term funds needed to cover the building stage of the home (6-12 months) before converting into a permanent long-term loan of 15 or 30 or 15 years. The interest paid while the home is under construction is considered tax deductible for current year taxes. These loans also offer rate protection options and allow homeowners to prepay without incurring penalties.
Buyers can expect a series of draws on the construction loan throughout the building process. While it is negotiable, a schedule typically starts with an initial draw of 15% of the loan amount for lot preparation and the home’s foundation followed by a second draw of 15-20% for home framing. Further draws are then needed for electrical, plumbing, appliances, and interior carpentry. and additional draws over the remaining months for the work on plumbing, electrical system, interior carpentry, etc. Prior to paying out each loan draw, a bank inspector will review construction progress to ensure progress is being made and confirm that work adheres to local building codes.
Many banks offering construction-to-permanent loans require a down payment of 20-25%. However, some lenders offer financing programs that link FHA-insured permanent loans with short-term construction loans.
Typically, the construction-period of the loan will offer a “prime-plus” interest rate. For example, if the prime lending rate is 3%, the construction portion of the loan may be set at an interest rate of 4.25-4.50%. Once construction is completed, the interest on the permanent portion of the loan will generally hover around the current rate for conventional mortgages. However, rates can be substantially lower if an adjustable rate option, such as a popular “5/1” adjustable rate mortgage is used. With a “5/1” adjustable rate mortgage, the rate remains fixed for the initial 5 years, but can then vary within a pre-set range each year after that for the rest of the life of the loan.
The preferred lenders you’ll find listed below offer a wide range of financing options, can help with pre-approvals, and are dedicated to facilitating a hassle-free process for every client. However, if you have a positive, longstanding relationship with another bank or mortgage professional, we are happy to partner with others throughout the approval and financing process.