There is not much home inventory out there right now and it might be a good time to think about building your home. If you are considering building a custom home, then you will need to obtain a different loan other than just a mortgage on a home. Here are the different types of loans that are available for those looking to build.
Sometimes you find the right lot or piece of land but are not planning on building for a while. If this is the case, then a lot or land loan is right for you. A lot or land loan is a little bit harder and more complex than a standard home mortgage. There are shorter terms, a higher downpayment, higher interest rates, and more commitment and underwriting for you.
“Owners of raw land are much more likely to stop making payments and walk away from the property in the event of a financial event in their lives,” says Casey Fleming, a mortgage adviser with C2 Financial Corporation.“And land is much harder to sell [than a home].”Many lenders do not even offer lot loans, and community banks and local credit unions can be a better bet than large national banks. As with any loan, be sure to shop around so you can compare all of the offers available to you.”
If you are ready to purchase land and build right away or if you have land and want to build, the construction loan is best for you. If you own land, the equity on the land can be put up as collateral to help finance your construction loan.
When you are shopping for a construction loan, make sure to choose a very experienced construction loan broker. There are two types of construction loans a standard short-term and an all-in-one.
A short-term loan is used most when someone is financing to build a custom home. The short-term loan is used to build the home, and then a long-term loan (mortgage loan) is used to pay off the completed home. In order to be pre-approved, you will need to have a downpayment of at least 20% to 30%, a good credit score, a low debt-to-income ratio, and cash reserves.
There are plus and minuses to using this type of loan. The negatives are you have to have two closings and you might receive terms for your second mortgage that aren’t what you were planning on due to rising interest rates. On the other hand, you might get a better rate if the rates are lowered during the time period you are closing on your mortgage. A positive to this loan type is flexibility due to the ability to pick and choose instead of relying on a package loan deal.
The other option is an all-in-one loan. So instead of two separate loans, lenders offer packages with short-term construction loan terms and a mortgage loan set in advance. The construction loan is converted to a long-term, permanent mortgage after the construction is completed, meaning there is just one loan and one closing. For preapproval on an all-in-one loan, you must obtain a qualified, licensed builder, detailed specifications about the custom home which includes projected costs, and a home value estimate from an appraiser based on the plans of the home you are going to build.
If you are planning to purchase land and build a home either now or in the future, contact a lender who specializes in these types of loans. They will not only be able to advise you on what type of loan is best, but also will get you the best rates possible with great terms.
“The construction-to-perm loan allows you to modify your construction loan to the permanent stage, which can be any term that you chose when the construction-to-perm lender offered it to you at the beginning of the construction stage. You normally do not have to requalify for the permanent loan,” says mortgage expert Joey Campbell.