So, you've figured out how you're going to pay for your new construction loan. What's next?
The next step is finding a bank!
1.) Do they offer new construction loans? Surprisingly, not all banks offer new construction loans.
Construction to permanent loan
This type of loan (also known as “single-close” construction loans) covers the costs of construction on your future home, in phases, while it’s being built. The lender who approves you will pay your builder in installments during each phase of your construction process. These payments are called “draws.” For example, if it takes $50,000 to complete the first phase of building your home, your payment will be toward that $50,000, and not the entire purchase price of your project. The lender will usually perform progress inspections as funds are requested throughout the construction phases: for example, pouring the foundation, beginning framing, installing plumbing, and so on until your dream home is completely built. With a construction-to-permanent loan, you’ll make interest-only payments during the construction phase, and will only pay interest on the loan amount required to complete that phase. Interest rates are always variable for that duration. They fluctuate with the prime rate.
Once your home is finished, and you move in, the construction-to-permanent loan rolls over into what will be the borrower’s mortgage. This allows you to only pay closing costs once. This is the type of loan Drew and I chose.
Construction only loan
A construction-only loan covers the construction of your home, in full, up front. The borrower pays the closing costs. When construction is finalized, the construction debt becomes your mortgage, which is considered a second loan, for which you pay closing costs a second time.
Construction-only loans are best for borrowers who have large cash reserves, or who want to shop permanent lender options while their home is being built. It’s also an option for people who will live in their current home while their new home is being built.
NOTES & TIPS: A construction-only loan requires little or no money down, because your current home is used as collateral during the building phase. Your payments during construction are on your entire construction loan (not broken up in smaller loan amounts that cover each phase of the build).
From Reinbrecht Homes website. https://www.reinbrechthomes.com/blog/new-home-construction-loans-explained/
2.) Ask about their interest rate. Interest rates are at an all time low right now which is definitely in your favor. Talk to multiple different banks and shop around for the lowest interest rate.
3.) Work with them to find out what your budget is for the total project. The banks have the ability to do a mortgage estimator that can tell you approximately how much your mortgage, insurance and taxes will be each month. This is a decent way to know what your total budget will be for the build.
4 .) How much do they require for a down payment? Factor in how much they require for a down payment. We were able to get a new construction for with 11% down, where other banks wanted 20% down. The downside to borrowing with less than 20% down is being required to pay PMI or private mortgage insurance. There are some loans like Fannie May where you can get away with not paying PMI and only putting 10% down but they typically have higher interest rates. My suggestion is to do what's right for your financial status long term. For us, it was better for us to pay PMI because that falls off when you hit 20% of your loan whereas the higher interest rate is stuck with you for the duration of your loan unless you refinance.