Due to the current real estate environment, many lenders have terminated their construction loan programs. As a real estate market cools, builders get stuck with excess inventory and defaults rates begin to rise. Lenders then have to decide where to lend their limited pool of money. Construction programs are often the first to go due to the turn around time (from initial building specs through final inspection) when coupled with the elevated chances for default. In the past, many companies had access to some great construction loan programs and may again in the future.
So, What Now?
Since the pool of available construction lenders has dwindled, we suggest checking with your local banks and credit unions. Many of these companies are more open to construction financing as they’re also interested in borrowers’ checking and savings accounts and potential investment revenue. You can also find mortgage companies using the rate tables on ForTheBestRate.com. Please note than many of the companies advertising in the survey will not offer construction financing. You may have to make a few phone calls to find out.
How do construction loans work?
Home construction financing will vary from lender to lender but they often share some of these common elements:
- Usually borrowers are required to pay on the interest only portion on their loans until they’re paid off.
- They are typically based upon a variable rate and tied to the prime rate plus a designated margin.
- Construction to permanent loans are popular solutions allowing borrowers to take out singular loans (thus potentially saving on closing costs and headaches).
- Interest rates for construction loans are typically higher than what’s found for purchase financing.
- Some lender charge a fee (and/or a higher interest rate) if a borrower decides to lock in an interest rate upfront.
Work with Someone with Experience
Construction loans are not something that everyone in the mortgage industry has a good handle on. I have been involved in the mortgage industry on and off since 2000 and very few of the companies I worked for did a significant volume of construction lending. And when someone in one of these companies did take one on, there seemed to be a lot of trial and error. There are many steps in the construction loan process which are not found in conventional purchasing financing (i.e. draws, architectural plans, etc). We recommend finding a lender and mortgage originator who has significant experience handling these types of transactions.
Please note that the mortgage rates, APRs, and closing costs posted on ForTheBestRate.com are for conventional conforming mortgages. They are not for construction financing. You’ll need to reach out to companies independently to see if they offer any type of construction financing solutions.
Not Sure if Building a Home is Right For You – Here are Three Items To Address Before Starting the Process
The reasons for choosing to build a new home rather than buying an existing home vary from buyer to buyer. While building from scratch offers many benefits such as lower maintenance, modern amenities, and being more energy efficient, there are a few special considerations every buyer should be aware of before making the commitment to build.
1. Calculate the entire cost. Is it worth it?
Some buyers mistakenly assume that by building a new home, they will be getting more for their money or that they will actually save money. While this can prove to be the case in some scenarios, don’t take it as a given.
In order to get an idea of what it will cost you to build, be sure to take in all expenses. The cost of the land, the cost of construction, plus any additional legal, zoning or municipal fees should be calculated. It’s a good idea to add about 10%, just in case of any unexpected costs.
Once you determine the overall cost of your new home, compare it to the value of other similar homes in your area. Are the numbers pretty similar? Depending on where you are building, price by square foot can vary greatly. In some areas, it may be typical to pay around $300/sf while other areas may be considerably less.
2. Not All Builders Are Created Equally
It may seem like a no-brainer, but hiring a professional builder with experience in your desired area is a must. Some buyers may be tempted to go with a “budget builder” in order to save money, but just keep in mind that you get what you pay for!
Hiring a builder who is familiar with your area is a big plus, since they will likely understand the area’s zoning regulations and land issues. Make sure you hire an architect or builder who is quick to communicate with you, keeping you well-informed of the area’s regulations. For instance, you don’t want to be unpleasantly surprised when you find out that your two-story home will take 2 years to complete, due to it being held up by public approval.
Be sure to ask builders for references and check the builders’ ratings on BBB.org and their state licensing authority’s site to see if there appears to be a history of problems. If the home builder is unable to offer references, ask for a list of addresses of recently built homes and attempt to speak with the homeowners on your own.
3. Building Your Dream Home Takes More Time Than You Think
Before construction even begins on your new home, you’ll probably spend dozens of hours deciding on various design elements. Customizing your home from scratch can be fun, but a lot of buyers don’t realize the amount of time it takes to cover every detail.
What type of floors would you like? What color paint do you want? Would you like to add upgrades, such as stainless steel appliances or a whirlpool tub? Be prepared to spend a lot of time going over questions like these with your architect – and be prepared to change your mind a lot, too.