Building a new home is exciting. Picking a floor plan and deciding on finishings to build your dream home. During the process, the question of new home construction financing is an important factor to make your dream home a reality. It is a critical part of the process.
How does new home construction financing work?
“We get this question a lot,” says Chris Ward, and experienced real estate agent specializing in new home construction. “The process is very different from a traditional resale home transaction”
And for answers to financing questions, we turn to Tracy Charlton. Tracy is a professional mortgage broker and Lead Planner for The Lending Outlet.
“Unlike conventional mortgages, funds for new home construction are advanced in multiple draws, as opposed to one single advance,” says Charlton.
Financing for the lot:
When purchasing a lot, most developers will require a minimum 10% deposit. Depending on the lender, the purchase of the land can be 65% – 75% loan to value. To secure a mortgage on the lot, the lender will want to see a construction contract for the home to be built.
Every lender has different policies for their new home construction mortgages. Lenders usually charge interest-only payments during construction. The rate and potential lending fees will be dependent on the lender.
Typical draws for new home construction are as follows (*these can change based on lender policy)
- Framing – 20%
- Lock-up 45-50%
- Drywall 75%
- Completion 100%
Some lenders will not give the first draw until lock-up (which is 45-50% complete). So it is very important that homeowners and contractors know when, and approximately how much draws will be so that there are no surprises during construction.
A builder typically requires 10% of the construction contract to get started. An appraisal will be ordered to determine the value of the lot and the construction of the home. The appraiser will be called to inspect each draw to determine the stage of completion. The lender will advance the draw to the lawyer or direct to the clients based on the inspection report. A search will be done on the property to determine there are no liens for each draw. There will be inspection fees for the appraiser and fees from the lawyer/lender for each draw.
Important considerations for new home construction financing
It is very important to ensure that there is an adequate contingency for construction, typically 10 to 15% of the construction budget. This is to cover off any increases in budget or unexpected issues. This can be added to the contract or savings set aside, which also may be dependent upon the lender’s policy. It is very difficult to make changes during construction that will affect value. So the less changes the better. Any changes to the contract are recommended to be put in writing and signed by both the homeowner and builder.
There also may be lien holdbacks for each draw or at completion. This will be based on lender policy and/or what the lawyer recommends.
While this all may sound confusing, a bank or professional mortgage broker can guide you through the financial part of your transaction. Tracy Charlton has been in the financing industry for over 24 years and has extensive experience in new home construction financing.
In addition to financial support, seek the advice of a professional real estate agent. A Realtor can represent you in your new home transaction. Your professional real estate agent can help you understand the new home construction contract and give you advice on builders terms. They can also provide valuable input on floor plans and finishings to ensure your investment is secure for resale.
Now the fun part. Find the perfect lot, pick your plan and build your dream home.
Call the team at Quincy Vrecko and Associates to start your search or fill out the form below and we will get back to you with answers to your questions.