Financing For New Construction

Larry Rhodes · April 30, 2019 · Home Stuff · 0 comments

When most people get a loan for a home, they are buying a house that is already built.  That means they will take out a loan that covers the existing structures and the land all at once.  However, when you decide to have a home custom-built for you, you will usually take out a slightly different type of loan.  There are a few ways to handle the financing of a house that is to be built for you.

Builder Financed Loans

Many people choose to finance the new home construction through the builder.  This can take a lot of the guesswork out of the financing.  The builder handles the financing for the construction period until the home is complete and ready to move into.  At this point the homeowner takes out a permanent, traditional mortgage on the home.

The benefit of this is that you let the builder carry the financing and then basically buy the home from them when it is done.  It saves you from having to do a dual mortgage, which is another option to consider.  It also lets the builder carry some of the risk during construction.

Taking Out Two Loans

If you finance both the construction and the home itself through your own lender, you will find yourself with two different loans.  The first is the construction loan, which is the cost of the building.  The second is the permanent mortgage that makes you the homeowner.

This is an effective way but can be more time-consuming, and means you have to apply twice for the two different loans.  The construction loan has a short time period and the permanent loan is the traditional mortgage.  You will have to pay closing costs on each loan and have different terms.  You may find that not every lender will offer both types of mortgage.

Combination Mortgages

A combination mortgage is a loan that is designed for people building new homes.  It involves only one application process and one set of closing costs, and basically converts from a construction loan to a permanent mortgage when the construction is complete.

This simplifies the loan application process but does come with a downside.  Because the options for the permanent mortgage are more limited in this scenario, buyers may find themselves paying too much on the loan in the long run. Choosing the right mortgage depends on your circumstances and what loan terms are offered through each option.  It’s important to compare them carefully and determine which one makes the most sense in the long term.

Photo Credit: @meandering_mari via Twenty20

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