Construction loans can be structured in a number of ways, depending on whether you also need to purchase land or already own a lot. If you already own land and want to build on it, you can finance your home in a variety of ways. Every lender is different, so it’s always a good idea to discuss your options with various providers to find the solution that works best for you.
Financing Through a Bank
When exploring new home financing with a bank, start with the one(s) with which you already have relationships. The better a bank knows your financial history, the more likely they are to work with you. However, not all banks offer construction loans, so if yours does not, you’ll have to look at other options in the area.
In most cases, you will have to make a down payment of 20-30% of the total loan amount. However, if you own the land outright, you might have the option to use it as equity. This is a great option if you are trying to conserve cash and would prefer not to do a significant down payment.
Financing Through a Builder
Some builders have existing relationships with lenders or have created their own lending companies to make it easier for customers to get a construction loan. In many cases, these lenders offer competitive fees and rates, so even if you have the option to secure a loan with a bank, it’s smart to check with your builder before you close to see what they offer. A builder might also be able to provide multiple options, whereas a bank often only offers one path.
One of the benefits of financing through a builder is that you don’t have to be the middleman between the lender and the builder. Because they have an existing relationship, they will communicate the details of the home order, appraisal, and final approvals. The brokers that provide builder financing also have access to programs that banks and other providers do not, so be sure to explore all of your options.
Prepare Your Finances
Regardless of which route you take, any lender will want to see a record of your financial history. You can make the process go more smoothly by preparing the following documents in advance:
- Employment and income history
- The deed and title for the land to prove ownership
- Tax returns
- W-2 forms
- Bank statements
- Property appraisal
Most lenders look for at least three years of information, so start there and be prepared to add more as requested.
Understand the Timing
Construction loans typically come with a time limit before they are converted to a traditional permanent financing solution. This is designed to allow you enough time to build without having a mortgage payment. It’s important to know the construction loan term (when it starts and when it ends) and that the time frame is realistic. For example, if you get a bank construction loan for six months and the home isn’t complete at the end of those six months, you will have to start making principal payments, even though you have not yet moved in. This can present a cash flow problem for some households, so make sure you understand the implications of the lending agreement before you sign.
If you own land and are considering new construction, talk to an Adair Homes representative about the available options to finance your home. We created Alliance Financial Services exclusively for providing financing for Adair Homes customers. Alliance also offers a full suite of financial services, including permanent financing, and if you decide to refinance later, you already have a trusted partner. Contact us today to learn more.