If you want to find a Builder to build your home on a lot, how do you do that? One way is to have the Builder take out a mortgage, and in that situation, you normally have to make a pretty sizable deposit with the builder, often times it’s at least 20%. IF you own the lot, you might have to sign it over to the Builder. After all they are taking a huge risk that they will build the house, tie up their materials, man hours and credit line, and you might not ever be able to close. With our new a construction loan, you can combine your lot and construction financing into a single loan. We only require a 10% down payment, and when your home is complete, we’ll simply modify your construction loan to a permanent mortgage.
How to Finance A New Home With A Construction Loan
If you are building a new home, we will allow you to make interest only payment on the Construction Loan, until it converts to a permanent 30 year mortgage. Because of this, we allow you to take up to 9 months to build your new home. As each phase of the home is built, the builder will get payments, as the home is being built. An Inspector will come look at the Construction and let us know it’s time to send more money.
We offer this program for Owner Occupied Homes, and Second Homes (Vacation Homes). When your home is complete, you will not have additional closing costs, so this is considered a one-time closing, and that saves you money!
When we close on your Construction Loan, you’ll need to provide us a copy of a standard 12-month prepaid homeowner’s insurance policy. It must include “builder’s risk coverage.” This coverage protects you from financial responsibility for any damage, theft or liability that may occur while your home is under construction.
You won’t need to make interest payments until you begin drawing on your loan. So, if you close on your loan, and a huge storm delays construction for a few weeks, it won’t cost you anything. This is the perfect way to buy the lot and finance the construction. Plus, your Construction Loan payments are tax-deductible!
Construction loans are somewhat different from other mortgage loans because you are borrowing money for 9 months for a building that doesn’t yet exist. This Construction Loan a lot like a line of credit, like a credit card. The biggest difference is that we are tying the loan to the land with a deed of trust, and we are controlling when money is borrowed and released to the Builder.
Both you and the Builder you choose must be approved for the loan. The mortgage will only be in our name, however we need to know that the Builder has the financial strength and skills to get the house built on time and on budget. We have a checklist, with pretty standard stuff a Builder would give any other Bank, to share with your Builder.
Because of this, in addition to all of the other stuff we ask for when approving a loan, we will need documents from the Builder, plans and specs for the home, and information about the lot. We can get your Pre-Approved within 48 of receiving your documents.
We do not make these Loans to Builders. So if you’re a builder looking for a way to build your home, I’m afraid this Construction Loan is not the avenue for you. The maximum loan amount is $424,100.
The land is typically assumed to account for 25% to 33% of the value of the completed project. So, if you are building a house that is 2000 square feet, and your cost is $100 a square (cause I can do this math) that means your house is $200,000. If the Lot costs you $25,000 Your total project is $225,000, and we require a 10% investment of that amount, or $22,500.
If you already own the land (for at least 12 months), you will have an easier time getting a Construction Loan. The land will count as equity in the project, and this will reduce the down payment you need to make.
Construction Loan Tips
As with most things, the more planning you do ahead of time, the better. We suggest that you make any offer to buy land contingent on getting your Construction Loan approved. Also build enough time into your offer to apply for a construction loan and get approved. Again, we can get approval in 48 hours, but there’s additional paper work we will need, and we need information from the Builder.
Another thing to remember is that any “upgrades” or changes you make along the way will have to come from you. We will not be able to change your loan amount along the way. Because of this, we generally require 6 months of reserves for loan approval. Meaning if your mortgage payment will be $1000, we would need your down payment, plus we need to see that you have at least $6000 in the bank. If your credit score is above 720, we only require 3 months of reserve payments for loan approval.
Many of the NC Home Buyers we help previously went through a Short Sale and are now past the waiting period to buy a new home. If you previous had a bankruptcy, foreclosure, deed in lieu or Short Sale, there was a “slump” in your credit score. We can usually help folks add positive information to their report, so that they can buy a new home faster! The minimum credit scores to buy a home have gone up in 2017, but it’s still possible for most folks to get the scores they need to buy a new home in North Carolina! For the Construction Loans we offer, the minimum score is 680. Most Banks are now requiring a 20% down payment for scores under 720.
First Time Home Buyers who want to finance a new home with a Construction Loan, may benefit from a Mortgage Tax Credit. The credit is a dollar for dollar reduction in your Federal Taxes, and is available on homes under $245,000. There are income restrictions, which are set per county.
If you have questions about a Construction Loan and How To Finance A New Home, please call Steve and Eleanor Thorne 919 649 5058. We love helping first time home buyers and those who are ready to buy a new home in North Carolina!