How to get a loan to build a house

Instead of buying an existing house for your next home, have you considered building? Owning a completely new home can have many advantages, such as greater energy efficiency, lower repair costs and the opportunity to customize many features. The first step is to determine how to obtain a loan to build.

Beginning the process of a new construction loan
The initial steps to obtain a construction loan are similar to buying an existing house:

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Meet with a lender to get pre-approval for the amount you can afford.
Develop your wish list, including locations and features.
Visit new communities of origin and builders in the selected price range. An experienced real estate agent can be a valuable resource.
Your next funding steps will depend on whether you have decided to buy a production or a personalized home.

Buy within a development

If you buy from a builder who is building several houses within a specific development, a practice called construction of production, the financing process will be very similar to buying an existing house. In most cases, the builder can arrange financing for you, but make sure it is a competitive offer.

The main difference with other loans is that you apply for your loan when you sign the contract with the builder, but you do not close the terms of the loan until the property is completed.

Buy a custom house

If you have a house built on your own lot with your own design, you have many more financing options, but there are more steps involved. Unless you are paying in cash, you must make arrangements for a construction loan. These are not as widely available as regular mortgage loans, so you may need to shop around.

Some lenders offer a one-step loan that is only of interest while the house is being built and then becomes a mortgage once the construction is completed. The advantage is that you will have to pay the closing costs only once. Some lenders, however, prefer a less risky two-step process. This requires that you obtain a construction interest only loan and then refinance it into a regular mortgage when the house is finished. The short-term interest-only loan usually has a principal interest rate, while the later portion reflects regular mortgage interest rates.

Strong credit requirements

Construction loans are considered higher risk. You will need a strong credit and an initial payment of 20% to 25%. The specific advance requirement is determined by the cost of land and the planned construction. If you already own the land, you can use it as capital for your construction loan.

Your lender will also verify the credit and credentials of your builder. Reductions in funds are usually in prescribed completion points, which requires inspectors to approve progress.

Other sources of financing for new construction

If you have capital in your current home, your lender can offer you a bridge loan to use while your new home is being built and you are waiting for the current one to be sold. This can be a costly and risky situation, since you are planning to sell your home, but it can help you get over the time limit.

Another approach is to sell your current home and rent a temporary home while you wait for the new one to be built. While this requires you to move twice, it releases the liquid value of your home to use on your new property.

There are some additional steps involved in financing the construction of a house. When you consider all the pros and cons, you may discover that the advantages of a new home outweigh the complexities. Happy construction!