Most people think of existing homes when it comes to buying, but there’s another good option out there: building a house from the ground up. If building seems out of reach to you, it’s time to rethink that belief! Not only can building a home be a more economical choice to ensure you get all of your must-haves, it may also be one of the best options in the current real estate market, where inventory is in short supply and the median existing home price is hovering at nearly $350,000, according to the Mortgage Bankers Association.
Financing a New Build
If the thought of building a home wasn’t on your radar, you might be wondering how the mortgage process works when building a new home. For starters, a construction loan is generally a short-term loan that covers the costs of building a new home or renovating an existing structure. Once the home is complete, your loan will be refinanced into a traditional mortgage, which will require you to make a monthly payment throughout the life of your loan.
How Does It Work?
Like a traditional mortgage, a construction loan begins with a pre-qualification, which will help you determine how much you can afford before you dive into the process. You’ll get an estimate of your anticipated construction loan payment as well as an estimate of the cash you’ll need to bring to closing.
You’ll have to complete a full application with your mortgage lender, which will require your financial history, employment history, and more. You’ll also need to have your qualified builder (Class A or equivalent) lined up, as the bank will need to request some information directly from the builder.
Next, a disbursement or draw schedule will be created, which sets up a calendar for payments made to your builder throughout the process as certain milestones are met. Typically, there are 5-6 disbursements depending on the size and scope of your project.
Approval and Closing on Construction Loan
As you make it through the application process and receive full approval for your loan, there will be a few additional steps, such as obtaining an appraisal and title insurance. Once everything is complete, you’ll be on your way to closing on your construction loan! This is a two-time loan closing: one closing for your construction loan and a second closing for your permanent mortgage. After construction closing and once all building permits are obtained, construction can begin. Your builder will be paid after each phase of construction based on the draw schedule.
Closing on Your Permanent Mortgage
Once the home is complete, you’ll work with your lender to refinance your construction loan to a permanent mortgage, and voila – your home building journey is complete!
What About Buying a Fixer-Upper? Consider a Renovation Loan
Sometimes, you fall in love with an existing home that needs love to make it work for your family. Or with the current rising home prices, you may find a home in your budget and desired location that needs some work to make it your dream home. That’s where renovation loans come into play! Generally speaking, major renovation costs are rolled into the mortgage, and the home’s value is based on the completed project after all repairs and renovations are complete. There are several renovation options available to help meet your needs. If you’re considering purchasing a fixer-upper, talk to your lender early on to determine the best path for your renovation journey.
Construction loans can be a bit more complex than a traditional mortgage. It’s a good idea to discuss all of your potential mortgage options with your lender before you dive into the home buying process to ensure you make the best long-term decision for your needs!
When you’re ready to begin (or continue) your homeownership journey, C&F Mortgage is here for you. Our team is dedicated to helping you find the home of your dreams, whether it’s a charming, well-loved home or a brand new build that you help design. Get in touch with us today to learn how we can work together!