If you’re ready to upgrade to a larger or higher-quality home, you’re probably already considering whether a custom home is right for you. The custom route is the sure-fire way to get exactly what you’re looking for, no matter what that may be.
Of course, buyers who are new to the custom homebuilding process often have a lot of questions. One of the most common ones revolves around financing. Most people are accustomed to how financing works for a traditional mortgage. But how does financing a custom home differ?
Of course, financing for a traditional, pre-built home involves the purchase price of the house, as well as your closing costs. Financing a custom home, on the other hand, includes the purchase price of the land (if you don’t already own it), the cost to build the home, the cost to develop the site, and all closing costs.
The Financing Process
The process of financing a home varies slightly depending on whether you are buying an existing home or building your own.
Financing a pre-built home is a one-step process, in which the buyer obtains a loan through a mortgage lender.
Financing for a custom home is a two-step process:
- First, you obtain a temporary loan to get the project started. This is a standard construction loan that includes the cost of your land.
- When construction is complete, you refinance your initial loan to obtain a regular mortgage.
Your initial, temporary construction loan kicks off the building process and covers the cost of your land. To secure the best loan for you, look for a lender that offers construction loans at competitive interest rates with little or no money down.
Building a new home on your own land gives you the unique opportunity to build “move-in equity” by taking care of certain site development tasks yourself. With a bit of a DIY spirit, you can save money before and during the building process by managing tasks such as:
- Graveling a temporary driveway
- Excavating the building pad
- Providing a portable toilet
- Painting the home
By participating in the site development process, you have the opportunity to create immediate equity, without the need for a huge down payment. This is one perk of custom homebuilding that is simply not possible when buying a pre-built home.
Once construction on your new custom home is complete, you can choose from a variety of permanent financing and refinancing options, including conventional, FHA, VA, and USDA loans. Depending on a variety of factors, such as your budget and income, you might select a 15-year or 30-year mortgage with fixed or variable interest rates. You can also choose an interest-only or a debt consolidation loan.
Finding the Right Lender for You
As you can see, the process of financing a custom home is much different from a traditional mortgage. To ensure you get the best rate possible, as well as loans that meet your specific needs, look for a lender that specializes in custom home financing. Seek out a company that offers construction loans with little or no down payments, and will meet your needs for permanent financing options.
Most importantly, find a lender that will work closely with you and keep you well informed throughout the entire process. Building your first custom home can feel a bit daunting at first, and you want a lender that makes financing a hassle-free part of the process.
Interested in learning more about the custom homebuilding process? View the Adair Homes Path to Home Ownership guide to see the seven simple steps toward starting construction on your new dream home.