Who hasn't ever thought, "Gee, if I could build my own home, I could design everything exactly the way I want it." And every year thousands of Americans do just that-build their own homes. When you look around the community, many times available existing properties were built when we lived quite differently. Maybe a one car garage, one full bath home just isn't cutting it for you, no matter how nicely it is upgraded. So you start thinking-what if I built a new home? How much will it cost? Can I get a loan for a new home?
Mortgage loans are blind whether what you want to buy is a new home or an older home-what you can afford given your income and debt ratios is what you can afford. It doesn't matter if it is old or new. However, the key question you need to answer is-what will the amount I can afford buy me in new construction? The answer varies from market to market, but size, location, and amenities normally play a role in the price of a new home. You may be able to afford a home with a full basement in a pre-existing home but not be able to afford the cost of adding a full basement to a new home. In any case, if you can't find what you want in existing housing, building a new home may be for you.
In terms of the financing, there are two ways to obtain a loan on a new home. One is using a construction loan. In this case, you as the buyer would obtain the money to pay your builder as he moves through different phases of construction. The builder obtains money (a draw) as each phase is completed. There is an up side and a down side to construction loans. The up side is that you have (the illusion at least) of having more control of the process. You are the one who writes the check to builder as each component of the job is completed. However, there is a down side too. You are the one paying the interest on the project and if it is delayed by weather, a shortage of lumber,drywall etc. you are the one footing the bill. Many construction loans now have a one time close so the loan will move into your final loan without having to go through the closing process twice. Buyer construction loans are often used when dealing with a custom builder or a more expensive home builder that is building outside of a development project.
The second way to finance your new home is with builder carried construction loans. The positive to this is that if there are delays, the builder will be the one paying any extra interest. The builder is also the one who manages the draws for each phase of construction. (Keep in mind that most communities require permits to be signed off on by government officials-so your builder does have accountability to meet local building codes and rules.) And the obvious question is-do you have the expertise and knowledge to know if he was meeting local requirements anyway? So the power of the checkbook isn't quite so great as some would think.) This is the simplest method of obtaining financing for your new home. Not all builders can carry the construction loan of course, but if this is your preference you might choose to shop for a builder who can.
In order to finance your home either way you would determine how much you can afford by going through the pre-approval steps to determine price range. How much you actually spend depends on the builder you choose, amenities, building site and prep work for the site, etc. I normally add another step to the process and that is to submit the loan file for credit underwriting prior to the builder starting the project. At that time we would know that the loan for the price of the home will be approved, and if there are any issues they can be dealt with during the construction process.
With regard to mortgages there are a couple of downsides to new construction financing: Until the home is about 60 days from completion it it is very expensive to lock an interest rate. Also - once the rate is locked and closing is in sight credit is repulled, and income and asset documents are updated. If there have been any significant changes to any of these to the negative, the loan may be in jeopardy. If you have purchased a home at the top end of your debt ratio and there is a significant increase in the interest rate from the beginning of the process, the approved loan amount could change.
However, if you have a good handle on your credit, income and assets, building a new home may be a possibility well worth investigating. Don't be shy about looking into it.
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