Building Your Dream Home with a New Home Construction Loan

by Courtney Christensen

Are you looking into building your dream home? A new construction loan may be the perfect fit for you. These loans cover everything from the land purchase to the roof tiling. If you’d like to design your new home from the bottom up, a New Home Construction loan is definitely the way to go.

What is It?

A home construction loan is generally granted when a family is looking to build their dream home. This type of loan is given to cover the costs of the design and construction of a residential home. Your lender will provide payments to your contractor in stages as the construction progresses. There are a couple different kinds of construction homes. One-time or two-time loans.

Regardless of the loan type you choose, a home construction loan will cover only the costs of permanent fixtures in your home. This means that you cannot use these funds for things like furniture, appliances, or any other removable fixtures.

How Does It Work?

It all starts with deciding on the builder or contractor you would like to build your new home. Then, your lender will require some information from you: a timeline, detailed plans, and a realistic budget provided to you by your contractors. Then, your lender will take care of the rest! While you busy yourself with choosing flooring, kitchen counter tops, and paint colors, your mortgage lender will manage all your construction funds for you by tracking and dispersing all payments to your contractors. They will order periodic inspections from certified home inspectors and appraisers to ensure work is completed to your specifications and finishing in a timely manner.

Types of Loans

Like previously mentioned, there are two kinds of construction loans: one-time and two-time. Both of these loan types are for primary residences only and both offer pros and cons.

One-Time Construction

  • Combines your construction financing and permanent financing
  • Interest rate locked before ground breaking
  • You can review and possibly lower your interest rate if the market has improved by the time your home is complete
  • Finance options on both purchase of the land and new home construction
  • Often approval process and one set of closing costs
  • Minimum 10% down payment
  • Interest-only payments during construction period
  • Fixed rate, permanent financing terms of 15 or 30 years
  • Loan amounts to Fannie Mae conforming limits
  • Flexibility of a 6-month or 9-month construction loan term

Two-Time Construction

  • Great for those wanting assistance with budget and a variety of loan programs
  • Competitive extended rate lock options
  • Interest rate will be determined with market at time of completion
  • Finance options on both purchase of the land and new home construction
  • 5% down payment due at construction closing but can be reimbursed when build is complete
  • Interest-only payments during construction period
  • You can choose from any qualifying mortgage product including fixed and adjustable rates for the end loan
  • No maximum loan amount for qualified candidates
  • Up to 12 month construction loan term

How Do I Get It?

In order to qualify for a new home construction loan, you more than likely need to have the following:

  • Good to excellent credit score 
  • A low Debt-to-income ratio
  • A stable income

You may also need to provide at 10% down payment, but that depends on the type of loan you choose to use. Either way, it is important to have extra cash on hand in case of the likely event that the project runs over budget and your contractor requires a larger budget. 

FAQs

Should I buy or build?

You have several options ahead of you when it comes to getting a new home. You could buy, build, or something in between (like a modular home). There are pros and cons to all of the options, but only you can decide which is best for you and your family. Take a look at this blog post which will go in depth into your choices and all the good and bad that comes with them.

What if the rates are lower at the time my home is complete?

The One-Time Construction loan program as a float down option available at the time of conversion. This will allow you to get a better rate if it has dropped when your home is completed.

If I am approved for a Mortgage loan, does that mean I am approved for a Construction loan, too?

No, not necessarily. The guidelines and requirements differ some, so be sure to let your Loan Officer know that you are looking for a construction loan so that can be considered.

When will I start making a monthly payment on my construction loan?

Any funds for down payment brought to the closing will always be used first to pay off the land purchase and/or builder fees during the construction. The first month following that first payment of construction loan funds will be the first month that interest payments are due. These payments will increase as more fees are paid throughout the construction of the home.

What construction term should I use, 6, 9 or 12 months?

When choosing a term, keep in mind the time of year, the size of the home construction project, and the contract time frame stated on the purchase agreement with the builder. If the closing is taking place in the later fall months, it may be a good idea to use a longer term in case of weather delays.

So, if you're looking to build your dream home in the next year or so, you have more choices to make outside of paint colors and brand of appliances. Make sure to talk to your lender about a New Home Construction loan, you may be surprised at how well it will fit your unique situation. 

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