There’s no place like a new home!
If you are buying new construction, then you may fall into one of these categories:
1) The builder is offering to build a home on land he owns and you need to obtain a loan when the house is 100% complete and ready for you to move in.
The terminology for this is that you will be obtaining an “end loan”. In this scenario you could buy a newly constructed home with no down payment at all if you qualify for an RD or VA loan or with just 3.5% if you use an FHA loan or only 5% down (or more) if you finance with a conventional loan. This is a great option for people with a low down payment. FHA and RD have special requirements for new construction and we are both experienced and skilled at working with builders to meet these requirements.
2) You already own some land and want to build on it. In this case, you could either take out the construction loan yourself or the builder could take out the construction loan leaving you to only worry about the end loan. If you are to be responsible for the construction loan, then we can help you with that too. If you have an outstanding mortgage on the land, then the construction loan will be used to pay off that loan and then to disburse funds to the builder as construction progresses.
3) You want to look for a lot of land and find a builder to build you your dream home. Coordinating the transaction can be the most difficult part. A construction loan can be used to purchase a lot of land and then used to disburse funds to the builder as construction progresses. However, in order to obtain a construction loan, you will need to have a house plan, a builder and an agreed upon price. If you have found the land, but have not yet determined which house plan or which builder, then you can obtain a land loan. Generally, the land loan requires 30% down but there are some banks who may do as little as 20% down. If you do not have to purchase the land in advance and you have a house plan and builder ready to go, then you can use the construction loan to purchase the land and then disburse funds to the builder as construction progresses.
How a construction loan works:
1) The builder will need to have provided you with a house plan and a set price to build the house and complete all site work. Builder references will be checked by the bank. The builder will work with the bank to determine a schedule for disbursement of funds during the construction phase.
2) The cost of the land and the house price is added together to get an acquisition cost. It is important to determine what allowances you will get for items such as flooring, cabinets, fixtures and appliances. If you spend more than the amount of the allowance then you will need to pay those amounts out of pocket (above and beyond the required down payment). If you do not have extra money to pay for these items then you must look very carefully, in advance, at the allowances given to determine that you can stay within budget.
3) Your down payment is based on the acquisition cost and generally you will be required to have a 20% down payment based on acquisition cost. For example, if the lot costs $100,000 and the cost to build the house is $200,000 then the acquisition cost is $300,000 and your down payment is $60,000 (20% of the acquisition cost of $300,000).
4) When you close on the construction loan, you will either purchase the land at that time or pay off any liens on the land if you already own the land. The bank will allow a small disbursement to the builder at closing to get started. Additional disbursements during the construction phase will be made upon request. Normally when a request for funds is made, the bank sends a representative to the site to determine the job progress and the amount to be disbursed based on work completed.
5) During the construction phase, you will receive a monthly bill for interest due on the amount disbursed up to that point.
6) When the house is 100% complete, your construction loan will be paid off and you will be put into an end loan. This is typically a 30-year fixed rate loan but it could be for any other term you desire and are approved for.