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Embarking on the journey of building a new home involves navigating the complexities of home construction loans. Traditionally, individuals secure financing for land, construction, and the eventual mortgage through banks, credit unions, or other financial institutions. This article delves into the details of home construction loans, shedding light on the process, potential challenges, and alternative financing options available to prospective custom homeowners.
If financing is a roadblock to you owning your dream home, Kurk Homes has options. Although we do not have “in house” financing, most of our customers work with our preferred lenders in order to get quality service and the best possible interest rates. Contact us now for our preferred lending partners.
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The construction of a new home commonly requires obtaining a construction loan from a bank or credit union. Unlike alternative financing models, a construction loan provides funding throughout the building process. This financial tool covers the costs associated with construction and is repaid once the home is completed. We work with lenders to create a draw schedule based on percentages of completion in the home's construction process, typically 5-6 draws per home each requesting from 16-20%. The initial monthly payment from a construction loan starts modestly and grows in tandem with the percentage of completion of the home.
For those opting for traditional construction loans, a streamlined option is the single close construction loan, or one-time-close. Lenders specializing in this model simplify the borrowing process by combining interim construction financing and the permanent loan into a single set of loan documents. This approach saves time and potentially reduces costs associated with multiple loans.
Advantages of Single Close Construction Loans
One loan covers both construction and permanent financing.
Land purchase and construction costs can be included in a unified loan.
Time and cost savings compared to managing multiple loans.
Construction periods of up to 18 months accommodate building and selling existing homes.
Another option to consider is the two-time close construction loan. Unlike the single close construction loan, lenders offering this model split the borrowing process into two separate closings: one for the interim construction financing and another for the permanent loan. While this approach may require additional steps, it offers certain advantages, such as greater flexibility in securing permanent financing terms and rates.
Advantages of Two-time Closes Construction Loans
With two separate closings, borrowers may potentially save on closing costs compared to a one-time close construction loan.
Borrowers have the flexibility to shop around for permanent financing after the construction phase, potentially securing better terms or rates.
Lenders may perceive two-time closes as less risky since they can evaluate the property's value after construction is completed before committing to permanent financing.
Borrowers have the option to switch lenders for permanent financing if they find a better deal during the construction process.
Securing a construction loan involves meeting specific criteria and addressing any potential or perceived risks. Builders are typically required to hold valid contractor licenses, demonstrate a history of constructing quality homes, and provide comprehensive plans and specifications outlining the construction project. Borrowers may be expected to make a substantial down payment, ranging from 20% to 25%, to mitigate the lender's risk. Also, the cash buyer option for construction provides a straightforward and efficient way to finance the project using funds from investment accounts, offering flexibility by allowing you to allocate your assets and the ability to avoid traditional financing.
Navigating the landscape of home construction loans involves a thorough understanding of available options, from traditional construction loans to alternative financing models and one-time-close construction loans. By considering the benefits and potential challenges associated with each option, prospective homeowners can make informed decisions aligned with their financial goals. Collaborating closely with lenders and builders affiliated with the construction process and each other facilitates a smoother loan process, providing peace of mind throughout the home building journey.