Financing Your Custom Home
The topic of home financing doesn’t have to be intimidating. To simplify everything for us, we sat down with DeAnna Morgan, Senior Loan Officer of The Morgan Group at Mid America Mortgage to walk us through the process. Financing the construction of a custom home is different from a typical mortgage. When building your dream home you need an interim construction loan - a loan most people are much less familiar with. In this post, we hope to provide a basic understanding of custom home financing.
The three primary transactions in custom homebuilding are the land purchase, construction, and a mortgage. When securing financing, you may need a separate loan for each although various institutions will package these types of loans together.
If you do not already own your piece of land outright, the lot loan will serve to purchase your homesite. The interest rates for this loan will vary depending on the location, size of the lot, and value of the land along with other considerations. Once you have your land, you can begin building your home. The actual building project is financed through an interim construction loan which is set-up to release periodic draws to pay for the phases of construction while the house is being built. Once the building is complete and the project is finished, you are then ready to take out a mortgage for the completed home.
Construction Loans
Different from a typical mortgage, construction loans are of short duration, usually 6-9 months depending on the scope of the project. Since there is no existing home for the bank to use as collateral for the loan, a construction loan typically requires a larger down payment of anywhere from 15% to 20% of the total loan cost. A huge advantage of our partnership with DeAnna at MidAmerica Mortgage is that her firm has the ability to offer a 5% down payment on the interim construction loan with certain requirements being met!
Mortgage Loan
Once construction has been completed, you will need to refinance your interim construction loan into a mortgage or “permanent” loan. There will be another set of closing costs for this and interest rates will vary depending on the value of the completed house, your financial position, credit worthiness, and other considerations.
Pros and Cons of an Interim Construction Loan
Benefits
One benefit of construction loans is that they are interest only. The monthly payments are lower, so you can save towards your mortgage. Terms are often more flexible than those of a traditional mortgage loan, and the additional scrutiny helps your project stay on track and on budget.
Disadvantages
The main disadvantage of interim construction loans are the higher interest rates and stiffer qualification requirements. You pay for the flexibility with higher qualifying standards. From a bank's perspective, construction loans may seem riskier since the primary source of repayment is the permanent mortgage loan. This is why most lenders require a pre-approval for permanent financing before approving a construction loan.
Our Partnership with MidAmerica Mortgage
On top of the opportunity to pay a 5% down payment versus the typical 15%-20% down payment to secure the loan, our partnership with MidAmericaMortgage is custom built to fit each client's needs; the team at MidAmerica Mortgage works to design a relationship tailored to you and your individual needs. They are committed to providing a unique approach and experience to lending. They bring the extensive experience and knowledge needed to lead a successful mortgage transaction while taking their time to guide homebuyers through the process. Throughout the process our clients will receive gifts to show their appreciation for their business. They also have a referral program for buyers when they refer clients to them. They do everything in their power to ensure our clients receive the highest level of service and at any time during the process if you have any questions, comments, or concerns, they are there to listen.
Securing your financing before building your custom home will provide the security of knowing you can pay for everything you need during the building process. Like any loan, you and the lending institution are taking on some risk, so partnering with a reputable builder can lower your interest rates and help you obtain the best financing possible. Building your dream custom home may be a once-in-a-lifetime-achievement, so you should feel comfortable talking to your builder and their lender referrals in depth about all financing options.
If you have specific questions about securing financing for your custom home, feel free to contact DeAnna Morgan at 972.755.4876 or contact our team today. We’ll be happy to answer any and all questions you may have!
