Traditionally it has been more difficult to obtain a mortgage for a home yet to be built than for an existing home. A lender faces more potential liabilities when financing a home that doesn’t yet exist. Because of this, construction loans have often required higher down payments and higher interest rates than a mortgage on an existing home.
The first thing to keep in mind is that construction loans are what they call “story loans.” The lender will want to understand the story behind the property, the buyers and their plans for improvements. For this reason it is often better to work with a local bank who is familiar with the area.
Construction loans are typically short term loans.
In order to qualify for a construction loan, a qualified builder must be involved. The lender will require detailed specifications on the work to be done: floor plans and a list of materials, often called the home’s “blue book.” The bank will require a qualified appraiser to estimate the ultimate value of the home to be built. Of course the borrower must pass all credit checks.
Once the home is built, the construction loan will need to be paid off in full, usually by obtaining a traditional mortgage, also known as the “end loan.” Once your home is complete, you have several options, aside from a traditional mortgage, for that “end loan.”
FHA loans are insured by the Federal Housing Authority. They generally offer attractive interest rates and have more flexible qualification requirements.
VA loans are guaranteed by the United State Department of Veterans Affairs. It provides long-term financing for qualified veterans and their spouses in areas where traditional financing may not be available.
USDA loans are backed by the US Department of Agriculture as part of it’s USDA Rural Development Guaranteed Housing Loan program. USDA loans are available to home buyers with below-average credit, and are often 100% financing with reduced mortgage insurance premiums, and feature below-market mortgage rates.
It’s important to select a quality financial institution when seeking financing for new construction or for an existing home purchase. There are many products available and it is crucial to compare the products offered by various lenders to select the best mortgage at the best rate for you and your budget.