Build Your Home With a Construction Loan

Fri, May 10, 2013

Building a Home

Building your dream home is an exciting event. Most home owners, at some point, look around their home and think of things like, “what if the kitchen was a little bigger” or ” I would love a grand staircase”. Whatever your home wishlist entails it can be difficult to find a ready made home that meets all of your needs and desires. Building a custom house can be the solution to having the home you always dreamed of.

Most people do not have the money to build a home from scratch, that’s where a construction loan comes in handy. A home construction loan may be offered by your local mortgage banker or credit union. The loan can pay for the cost to purchase the land, pay for permitting fees, and the cost to build.

In order to get started speak with your mortgage lender about getting pre-qualified. This will give you an idea about how much you can afford and help you to create a budget. For example if you can qualify for a maximum of $400,000, you need to tell your realtor and your contractor. Working together they can help you understand how much you can spend to purchase a lot and how much needs to go directly toward construction cost.

Finding the right contractor is an essential step. You should hire one that comes with recommendations and is part of the National Home Builders Association. The mortgage underwriter may review their qualifications as part of the loan approval process.

Part of the home loan approval process will be a review of your construction budget. During the coarse of the loan your contractor will submit invoices to the lender and the lender will issue incremental payments. This safety feature works in your benefit because you only pay for work performed. It prevents you from the risk of having a contractor take money and walk off the job. A lender will typically have someone inspect the job site to ensure that the materials and work being billed for are actually on site. In a construction loan, the mortgage lender becomes your partner to ensure that your home is built accurately and on time.

As with any home loan, you need to make sure that your mortgage works to help you achieve your financial goals. Work with your mortgage banker to secure the interest rate and mortgage term that meets your needs. Be aware that there are several types of construction loans and a construction to permanent loan is the most secure. This type of loan gives you the financing necessary to build your home, and a long term mortgage loan that pays off the construction loan once you have occupancy permits. A construction to permanent loan lets you lock in the interest rate and eliminates the stress of shopping for a long term mortgage last minute. Discuss your options with a mortgage lender when you apply and let them know if you prefer the security of a set long term loan or want to wait and float your interest rate.

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