Suppose you’ve decided to build your own home. You’ve found the land you want and you’re ready to buy and build. What do you do next?
There are many ways to finance a new home, depending on what makes sense for your situation. Your financing should suit your building program. Since there are almost as many kinds of new homes as there are home buyers, no one loan is going to work for all of them.
“There’s tons of programs out there,” said Ken Criswell, sales manager at Norwood Homes in Houston.
Sometimes, the builder can tap his own line of credit to begin construction, while the buyer needs only secure a mortgage loan after the home is built. Criswell often works through lenders that the home buyers have chosen.
“Many of our customers have a banking relationship already set up,” he said.
In many cases a buyer works with a builder who already owns the land. This is the most common scenario among first-time buyers, said Cheryl DeRoche, assistant vice president of LaSalle Talman Home Mortgage Corp. in Crystal Lake.
Many buyers will choose this route if they find just the right site and model. These are called production homes or semi-custom homes. The builder estimates the price based on the model and the extras the buyer chooses. You need to find a lender for an end loan only in this case (not a construction loan and end loan package.)
As always, shop smart.
“A consumer’s always wise to look for service, convenience and reputation,” said Gary Suess, president and CEO, Corestates Mortgage Corp., Perkasie, Penn. “Shop for rates, yes, but also ask how solid is the company? Can you get a rate lock? Can you get the service you desire? Is the lender flexible enough to meet your needs?”
Production builders typically have a list of approved lenders, DeRoche said. This business practice has developed for several reasons.
“Number one, there will be certain lenders who will not be familiar with new construction. With an approved lender, there’s a working relationship built up. The lender has already checked to see that the builder is bonded and is registered with the city where the construction is going to take place,” she said.
You can always shop around, and find out if other lenders’ programs match or beat the ones the builder is offering.
While first-timers may find their dream home in a builder’s model or subdivision, some move-up buyers or land owners will want a true custom home, built on their land to their specifications.
This can involve up to three separate loans-a land loan, a construction loan and a long-term mortgage loan. However, you can combine these in a total financing package.
Few lenders will provide a straight, land-only loan anymore, DeRoche and Suess said. However, “if people have a contract to purchase land, we will give them a construction loan that will pay off the sellers of that land with the first draw,” said DeRoche. “So, they avoid the cost of having to do a land loan. We’ve now taken the land loan and the construction loan together.”
Lenders who make land loans may only lend 50 percent of its value or less.
After construction is complete, the end loan pays off the construction loan and the buyer begins payment on the long-term mortgage.
This whole package should be negotiated very early in the home buying process. That way you can choose the right product and features that will save you money.
Lenders usually will guarantee a rate for up to 270 days while the home is being built. You can also get a float-down provision that will assure that you’ll get the lowest rate available during the six to nine months you’re waiting on construction.
“The product that’s having the most impact in our market is an extended rate lock program,” Suess said. “And usually those have float-down features.”
“With the rate lock they have the certainty of a bona fide loan commitment. With the float-down provision, they know that if rates improve they have the option to change their rates.”
It helps to hire a well known general contractor. That way the lender has the additional assurance that comes from the contractor’s reputation and experience, DeRoche pointed out.
