New Construction Loans

You are getting ready to build your custom designed new home and you will need to obtain financing for your project. Financing for your new construction home is readily available. When building a new home, there are many things to consider. Location, size, design, colors, cabinets, counter tops, and more. One of the biggest items, and often overlooked, is your new home financing.

Construction Loan Type 1:

THE BUILDER CARRIES THE CONSTRUCTION COSTS

This type of new construction exists primarily in new developments where you pick from one of the builders existing lots, then pick from a number of home models and designs that builder offers.

Once you pick the home model and lot, you will usually give the builder some up front deposit (earnest money) or usually about 1% of the purchase price, (but could be more or less) to build you your new home. The builder then build the home, with you closing on the deal once construction is finished.

With this type of new construction loan, you can pick from just about any type of mortgage loan, from standard conventional loans, FHA, VA, USDA, and even first time home buyer and down payment assistance loans. This is generally the preferred method for most people.

Construction Loan Type 2

YOU, THE BUYER CARRIES THE CONSTRUCTION COSTS:

This type of construction loan generally is when you find a lot for sale somewhere on your own that you wish to build a home. 

Basic Steps:

1. Find lot, find builder.
2. Builder provides a 'plans and specs' cost for the construction
3. Get pre-approved for your long-term "end" loan with us.
4. Apply for, and get your short-term construction loan (we help with this too. This loan typically requires 20% down of the land and construction costs.
5. Make interest only payment on the construction loan until the house is completed
6. Move into home
7. Pay off the short-term construction loan with an end loan, typically a standard 30-year fixed
8. Enjoy your new home

More Detailed Steps

This type of financing is more complicated, and paperwork intensive.

Once you've picked out a lot, and have worked with the builder to draw up the new homes "plans and specs", you go to mortgage lender or a small local bank for a construction loan. 

Due to the higher risk of construction loans, they generally require 20% for down payment, a very strong applicant with excellent credit scores, and low debt-to-income ratios.

The bank will review everything for the construction loan, including the builder's resume, experience, references, and then review the line item cost breakdown, materials list, your construction contract, and if you have an end loan pre-approval from a lender.

Assuming all looks good, the lender approve your construction loan, and will slowly give out money to the builder as the make progress on the build, known as draws. Most banks limit the draws to just four over the construction period. Usually the first draw is to buy the lot. The second draw is after the foundation is in, and the third draw being after framing is done. and the last draw when everything is done.

During the construction period, you will usually make interest only payments to the lender, based on the amount you have used so far (drawn) so far. Most construction loans are good for only 6 months to 1-year before you need to pay them off.

As the home nears being finished, or is completely finished, you now need to prepare to pay off the banks construction loan. Typically within the last 45-days before the home is finished, you will work again with a traditional mortgage lender, like us here at Cambria Mortgage, to select your end loan, which is usually the standard 30-year fixed loan.

We will collect updated pay stubs, W2's, bank statements, etc, and finalize your long-term end loan approval, including calculating your final constructions costs to determine your end loan amount.

Your home construction is now finished, and you move it.

Shortly thereafter, you will close on your new long-term end loan, paying off the short-term construction loan.

If the builder is carrying the cost of construction, you can use any mortgage lender you wish for the mortgage loan. Banks, Brokers, or independent Mortgage Companies (like us). Most builders will require you to get pre-approved up-front before they start building your new home, and to provide them with a Pre-Approval Letter.

If you are carrying the cost of construction with a true construction loan, these loans are most often done with small regional banks  with specialized construction loan departments. This is who I suggest you use. We partner with a few local banks to assist you in a seemly process between the construction loan and the end loan.

The final "end loan" after the construction is done can be obtained from any mortgage lender, but of course we hope you select us here at Cambria Mortgage, the Joe Metzler Team, as we have a lot of experience with this process.

Buying a Home In A new Development?

BEWARE THE BUILDER INCENTIVE GAME

Has your builder offered upgrades, appliance allowances, builder paid closing costs or other incentives if you simply use their lender for your financing?

Caveat emptor, or buyer beware. Nothing is free in life, and YOU always pay.

Many builders will work very hard, and employ just about every gimmick in the book to get you to use their preferred mortgage company, which most often is owned by the builder. Generally they will try to entice you with various things called 'builder incentives'. Common incentives are "free" appliances or upgrades, or that they will pay for some of your closing costs if you use their lender, but they won't if you use any other lender. That one works really well for them.

Most big nationwide builders are the worst violators of phony incentives.

So what is wrong with the builder incentive?

They are almost always fake! While these builder enticements sound good to unsuspecting buyers, understand that nothing is free, and no builder is giving away anything.

The actual cost of whatever they are offering you is either ALREADY PRICED INTO THE HOME, or they build the cost into a higher interest rate on their loan than the interest rate you could get from any outside lender.  They use these fake incentive to entice, or lure unsuspecting buyers into using their internal or preferred lender, where they will make even more money off you, then just what they make from building the home.

So what is wrong with using their preferred lender?

General two things. The first being low experience, newer Loan Officers.

The second, and more important, is that in most cases you'll be paying higher interest rates than you would get using just about any lender not affiliated with the builder.

We commonly see clients pay about 1/4% higher interest rate using the builders preferred lender than using us. On a $400,000 loan, this amounts to about $60 per month higher payment. This amount to over $21,000 on a 30-year fixed loan. PRETTY BAD MATH.

Builders make a LOT of extra money with these sales tactics. Sadly, all the home owner got was a higher payment, and a phony sense of getting a deal, when they actually got zero in return. It sickens me knowing people think their home is worth more than they bought it for because of the 'free finished basement' or other enticement that actually isn't real.

It is illegal for a builder to force you to use their lender.

Yes, it is illegal to 'force' someone to use a specific lender. This is why they you bait you with phony incentives. The law states it is OK for a builder to offer an incentive, but it also says the enticement has to be bona fide (real). While government enforcement agencies know this is going on, it is hard to prove the phony enticement because of how easy it is for the builder to simply hide true costs in the construction costs into a higher purchase price.

TIP: If you talk about using your own lender, and the builder fights hard to prevent it, this is a clear sign of the phony incentive game.

How to fight back?

A buyer can still get everything the builder offers in most cases, AND use the lender of your choice. You and your agent must be very strong willed, and willing to put up a fuss. At the end of the day, the builder still makes money building the home, so they do want to sell it to you. They just won't make as much money off you!

No builder is giving away anything! They simply price the incentive into the overall cost of the home, then offer teasers to lure unsuspecting home buyers into their trap. Increase the margins on the home price by $20,000 – then give a buyer a $10,000 credit for closing costs by forcing a client to pay more with “their” lenders isn’t a deal.

“There’s a sucker born every minute” - P. T. Barnum (1810–1891), an American showman.

Most buyers would be better off telling the builder you’ll get your own financing and to cut the homes actual price to a no incentive price. Sadly, most new home buyers are blind from the glare of their shiny new object (the home) and end up smiling over the “deal” they received. Needless to say, the builder is left with a tidy profit.

TIP: Other enticements, like this special price, or the free finished basement if you sign by this weekend - are also phony. Believe me, you can still get the same price and the same offers if you think about it and come back ten days later.