Building a new home is a dream for many people, but financing new home construction can be a nightmare. It is different from getting a mortgage for an existing home, and a few different loans to complete the process may be needed. This post will cover a few financing options for new home construction.
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Options for Financing a New Home Construction
A Construction loan is specifically for building new homes. Unlike a mortgage, it is a short-term loan. Construction loans usually have terms of less than a year. Instead of the lender releasing the funds in a lump sum like a mortgage, it usually rolls out in stages. As the project hits different milestones, the lender will release funds to the builder. The borrower is generally only responsible for interest payments while the home is under construction. The borrower must pay the total balance once the project is complete.
In some cases, the borrower takes a construction-only loan. That means the loan agreement is only for the construction of the home. When the project is complete, they must acquire financing to make the final payment. However, there are also construction-to-permanent loans. With this option, the construction loan comes with a mortgage. The construction loan converts to a conventional mortgage when the project is complete.
Lenders typically will not issue a mortgage to build a new home. Mostly, this is because the home acts as security for the mortgage. If the house doesn’t exist, it isn’t available to secure a loan. However, most new home construction projects involve mortgages at some point. That is where construction loans that convert to a mortgage and construction-only loans where a mortgage is used to pay the construction loan come in.
Large builders often have relationships with lenders, and the builder might offer buyers various financing options. For example, they might offer construction-to-permanent loans. They might also have construction-only loans to cover costs until the project is complete.
Builder financing can be a convenient option for new home construction projects. However, the builder may have various incentives attached to these loans. Buyers need to review the terms closely and compare financing options outside the options from the builder.
Many buyers want to finance new home construction with funds from selling their existing home. However, the funds won’t be available until you sell the home. A bridge loan could offer short-term financing while you wait for the home to sell. After the home sells, you can use the funds to pay off the bridge loan.
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