How to refinance your new construction home

Hands of an architect and an engineer pointing at the architectural plan. they have a coordination meeting to make sure everything works

Owning a new construction home instead of buying a pre-existing one can bring many advantages to the table, such as better energy efficiency, reduced repair costs, and great opportunities to customize and add features designed to match your lifestyle.

Before you can live in your dream home however, you’ll likely need to find a way to finance its construction. For this, you will need a different type of mortgage compared to when you’re purchasing an existing home. Having a better understanding of the new construction home buying process can help you avoid any unexpected problems along the way and speed up the approval process, paving the way to your dream home.

Here’s what you need to know:

Getting a home construction loan

A construction loan is a type of mortgage that covers the cost of constructing or rehabilitating a house. Compared to conventional mortgages, they typically have higher interest rates and shorter terms.

It is the lender – not the borrower – who pays a construction loan to a contractor in a number of installments as specific milestones in the building process are reached. Once construction is complete, the construction loan is either paid in full or converted to a permanent mortgage.

Types of construction loans

Opting for a new construction is a terrific way to own a home that’s tailor-made for all of your requirements and preferences. The loan process can be challenging however, especially for first-timers.

Here’s some helpful information on how the different types of construction loans work.

  • Construction-to-permanent – Also known as a single-close construction loan, a construction-to-permanent loan automatically converts to a permanent mortgage after the building is finished, with interest rates locked in during closing. This is a great option if you already have a clear, straightforward plan for construction and want predictable interest rates.
  • Construction only – This type of loan requires the borrower to qualify and get approved, as well as pay for closing costs several times during the duration of the loan. A construction only loan needs to be paid off once the building is completed. This is ideal for buyers who possess large cash reserves, or are looking for permanent lenders while the home is being constructed.
  • Renovation construction loan – In a renovation construction loan, the cost of major renovations is included in the mortgage instead of financed after closing. The loan is primarily based on the home’s value after renovations and repairs are performed. This is an excellent option if you’re buying a fixer-upper, but don’t have the cash needed to complete the renovations.

What a construction loan covers

While each construction project is different, a construction loan typically covers costs for:

  • Materials and labor
  • Land
  • Fees, plans, and permits
  • Closing costs
  • Interest reserves (in case a buyer does not wish to make interest payments during the construction phase)
  • Contingency reserves (should the project cost more than what was estimated)

Getting a construction loan

New construction typically requires a down payment of 20% to 30%, although there are some renovation loan programs that require less.

Similar to other types of mortgages, the requirement for maximum debt-to-income ratio, minimum credit score, and amount of down payment varies from lender to lender. The requirements set are usually based on the amount of money you’re planning to borrow.

Choosing the right construction loan lender

Keep in mind that not all mortgage lenders offer construction loans. When you do find ones that offer construction products, keep a record of their rates and terms so you can compare.

Getting prequalified before you start getting into the blueprints of your new home is also a smart move. There are countless new construction home buyers who have made the mistake of spending too much on plans and specifications, only to find out later on that they’re unable to acquire a loan due to insufficient requirements.

Construction loans generally have the same credit underwriting as those of traditional mortgages. However, they may take more time to close as there are several parties involved, and the underwriting is based subjectively on potential value.

Building a home can be challenging and can take some time to complete, so choosing the best financing option for your needs is crucial. Working with an experienced construction lender who will help you navigate the process is the best way to ensure a smooth, stress-free experience.

Searching for new construction homes in Warner Robins, GA? Get in touch with us at Warner Robins Home Search today! Give us a call at 478.832.0388, or send an email to jasonleerealestate1(at)gmail(dotted)com.