New Construction Financing Basics

by vzorn

For many people buying a newly constructed or to be built home, the process is quite similar to buying an existing home. A great majority of the new construction loans are done with the builder selling a home and lot package. The builder carries the cost of construction until closing. You get a loan commitment on your loan and wait until the home is completed. The sale price of this package is then treated the same as if the home was actually existing already. Your downpayment is based upon this sale price. The appraisal is done with specs and plans and what the property will be in its finished state. Of course, the appraisal will be subject to a final inspection to confirm that the property was completed in substantial conformity to those specs and plans before closing.
A concern with new construction is what to do about the rate. They’re really low right now but what will they be several months down the road? When can you lock in if the home will not be complete and closing will not occur until 6, 9 or 12 months down the road? One option would be to float until you’re within a standard lock period, typically 60 days. That could work out great if the rates stay largely the same or drop. Another option would be to go with some form of extended lock or cap to protect your rate until closing. This can give you some peace of mind and eliminate the concern over rates increasing. This option will vary among lenders but typically expect to pay a higher interest rate for a longer lock period and may include an upfront fee for that protection. In some cases, the upfront fee may be credited back to you partially or in full. Beware though, if your construction time frame exceeds your lock period, your deposit may be forfeited. If the rates are higher at the time of expiration, you may be subject to a higher rate.
If the builder requires you to provide the construction financing, then the most common product would be a construction to permanent loan. This can be complicated but simply stated, the C-Perm loan closes then the money is disbursed to the builder in draws as the construction progresses. Expect to pay interest on the money drawn as well as inspection and title update fees at each draw. Once the construction is complete, the loan then modifies into the Permanent financing like a typical 30 year mortgage.
So, if you can’t find the home on the market that suits you, then perhaps new construction could be the way to create your dream home. If so, then for most buyers it will be basically the same as buying an existing home except you have to wait longer to move in. For others, a C-Perm loan will be more complicated but certainly a good option if needed.
Jay Domenic
Movement Mortgage
(434) 220-7630

Published on 2020-08-31 21:40:25