Obtaining a home building construction loan is vastly different from obtaining a standard home mortgage. You see home building construction loans are often tailor made to suit the situation. As a matter of fact, home building construction loans are often called story loans, because the loan officer listens to your story, and then writes the loan to fit your needs. Most traditional home mortgage loan officers are not qualified to do this because it can get very complex. The majority of home builders or contractors will help you fill out your paper work, and assist in every way they can in obtaining the construction loan. Let me walk you through the basics so you get a better feel for the process.
Obtaining a Home Building Construction Loan Basics: A Unique Loan
A home building loan is a very unique loan. It includes the cost of the lot if any, as well as the construction costs. After the home is built, most of them are converted into a regular mortgage type loan. This process varies a lot due to the amount of time, and the potential for over runs. Most home construction loans have a built in extra 15% or 20% for overrun costs, in case the home ends up costing more than you planned. If this amount is not used it is not applied to the mortgage. Another special feature of home building loans is the terms during the construction. Usually money is drawn by the builder or contractor as needed so that interest does not accrue on money that is waiting in the bank. Interest is only charged as money is withdrawn. Some banks ask for interest only payments during this time, and many charge no payments at all till the home is built.
Obtaining a Home Building Construction Loan Basics: Where to Obtain a Home Building Loan
There are a variety of ways to get a home building construction loan. The first and most logical is to ask local banks. This is usually a shopping process from bank to bank. If you have no luck with this you can try a mortgage broker. Mortgage brokers handle loans from banks all over the country. They do not charge a fee, because what they do is buy wholesale loans, and re-sell the loan to you as a middle man, so their fee is built in, and the loan costs you no more than if you obtained the loan from the bank. There are also loans offered on line if you prefer. It is a complex process, but some people manage to obtain a reliable home building loan completely on line. Also ask you home builder or contractor for their recommendation.
Obtaining a Home Building Construction Loan Basics: What to Look For in a Home Construction Loan
There are many factors involved in a loan, including interest rate, points, length of term, other possible banking fees and whether the rate is variable or not. All these questions will be ironed out at the time you get the loan. These loans are tailored to each applicant. Though they do not generally charge payments during the construction process, they may allow you to, and it may be a good option to pay down the loan before you are paying all that interest. It could result in taking years off the loan. Another way to save money is the length of the loan. A 15 year loan will save you a substantial amount of money over time compared to a 30 year loan, if you can afford a slightly higher payment.
Interest Rates are the main consideration of any loan. The lower the interest, the less you pay. The question of fixed or variable rate is an excellent one. A variable rate may offer you a slightly lower rate at the time, but if interest rates go up, your interest rate will increase. With rates as low as they have been in this decade getting a variable rate seems a bit risky. Any time you can obtain a loan for less than 5% it is a great idea to lock it in, and with rates between 3% and 4% there is very little to be gained with a variable rate. The interest rate cannot logically go much lower, but it could get quite a bit higher. In the 1980’s people paid as much as 15% interest on loans. It could happen again so fixed rate looks more appealing right now. The loan company may ask you if you wish to lock in your interest rate now, or wait till the home is built to negotiate the interest. If they offer a fixed rate of 4% or less, my advice would be to lock that rate in. A lot can change in a year, and the current rates are the lowest in many decades. The bank really cannot afford to charge less.
1. Obtaining a home building construction loan is different from obtaining a standard home mortgage.
2. A home building construction loan includes the cost of the lot if any, as well as the construction costs.
3. There are a variety of ways to get a home building construction loan. Check at local banks, mortgage brokers and ask your home builder or contractor.
4. There are many factors involved in a loan, including interest rate, points, length of term, other possible banking fees and whether the rate is variable or not.
5. Get as educated as you can on home construction loans and home building. Download the free New Home Steps Guide above and become smart on home building from start to finish.
I hope you found this article useful. This is one of the best times in history to take out a home loan of any kind. If you are financially prepared, not already deeply in debt, and have a steady job it’s the perfect time to invest in a home. Home building construction loans are easier to obtain, and you can get a better rate than any time in recent history, so act now and seal the deal on a low interest loan. Let me know if you have any questions.