How to Finance a Home Construction Project
If you have been shopping around for a home, but can never seem to find anything quite like what you want, it’s understandable if you are considering home construction for the first time.
Financing a new build is slightly different than taking out a mortgage on an existing property. First, you will need plans drawn up for the building, and then there is land to buy. Once that phase of the project is complete, you will have your hands full with financing the construction of your new property.
The process is only made difficult when not approached in a logical and progressive manner. When thinking about home construction, think in stages. Throughout the project, you will complete and sign off on each stage before moving to the next.
Home Construction Loan
The purpose of a home construction loan is to put you in the financial position to complete your build. For this reason, home construction loans are usually short-term. Once the project is complete, you will need to refinance to pay off the initial loan, which is made possible through the provision of what is called an “end loan.”
The theory behind taking out a short-term construction loan, and then refinancing to pay it off, is you get to choose the best type of financing for your budget. So long as you make the right decisions regarding your end loan, you should not feel financially overburdened simply because you opted to build your own home, rather than buying into the existing housing market.
Builder & Materials
When trying to secure a home construction loan it is important to have all your ducks in a row, so to speak. Firstly, you need to hire a qualified builder. The contractor you use must be licensed and have experience in home construction. Additionally, your builder needs to have a proven track record in completing high-quality home construction projects.
The lender will ask you to provide detailed specifications for every aspect of the build. This is not an optional part of the application process. Your specifications must include floor plans and a list of materials the builder intends to use during the construction process.
Before the home is even constructed you will need an appraisal of its value. The appraisal will allow the lender to value the property based on the specifications of the home. This includes the value of the land for the construction project. Once this stage of the appraisal process is complete, it is time to get a true valuation of the completed project.
“Comps,” or comparables, are homes that are used to complete the appraisal on your construction before it is complete. The appraiser can use the plans for your home to compare to existing similar properties. Location, size, and features are just some of the comparisons that are used to make the final appraisal.
A down payment is a precondition of securing a home construction loan, so you will need to factor this into your initial budget. The down payment provides the lender with security as well as assurances that you are committed to completing the project.
Post Construction Savings
More than ever, home construction is becoming focused on passive design techniques. The idea behind a passive design is to reduce reliance on heating and cooling systems. You can save on your energy bills, which will go a small way towards helping you manage your budget in your new home.
A reputable builder will understand passive design techniques and how they can help make your new home more energy efficient. Make sure to shop around for a contractor who can deliver exactly what you want, at a price you can afford. You can find licensing and other helpful information from the Department of Labor and Industry for your state.
Galaxy Lending Group can provide you with expert loan guidance before you begin the process of home construction. We understand this is a complex project, especially for first time home builders. It is better to seek help and advice before beginning your project so you can avoid some of the common pitfalls involved in the process.
At Galaxy Lending Group the loan consultation process is free, and you are not committed to availing of our lending services. If you need information or access to resources, we can help connect you to the right people. Every homebuyer’s circumstances are different so take the time to ensure you get the right solution for your specific construction project.
If you would like to set up a consultation with an industry leading loan professional, reach out to Galaxy Lending Group today. You can call on the number for your state or use our online contact form to reach out to a member of the team.