Unless you have the cash to pay for a new construction home in full, you’ll need to finance your new home build. New construction home loans work a little differently than traditional mortgages, but there are some similarities. If you’re already familiar with the homebuying process, you can get up to speed on new home construction in no time.
Let’s explore some commonly asked questions about new construction home loans:
A new construction home loan is a loan that covers the expenses you may have while building a new home including materials, labor and land.
Construction loans provide funds during the new home build process. They typically last 12 to 18 months, unlike the 15-year or 30-year loan you might be able to get with a traditional mortgage.
Just like the traditional mortgage loan process, a new construction home loan has to be approved and go through title company closure. You’ll also be required to pay closing costs and processing and origination fees to the lender.
Since you don’t receive all the money up-front with a new construction home loan, you’ll first want to budget what you need to complete construction. Then, you’ll receive installments to pay for the construction work in stages, similar to a line of credit.
To receive the money, the work is typically completed first. Then, the lender will send an inspector to the job site to evaluate the construction and approve the loan request. You’ll then receive the money to pay for the work completed.
You may wonder what your options are if you can’t pay back what you owe after the construction loan ends in a year or year-and-a-half. That’s a common scenario, which is why you could choose to get a loan like a construction-to-permanent loan. When the construction is complete, the construction loan would convert to a fixed-rate, permanent mortgage loan, typically with a 15-year or 30-year term.
You may also be able to refinance a new construction loan into a mortgage loan. Once construction is complete (and if you have the means), you can also choose to pay off the construction loan in full.
Lenders do tend to see new home construction as a bit riskier than established homes, since there isn’t a finished asset to secure the mortgage. That can make it a little harder to get approved for a new construction loan.
Lenders may also want information on your builder or general contractor. In some cases, that may impact loan approval. Working with a reputable home builder with new home construction experience can help improve your standing as you seek new home loan options.
However, you won’t have to worry about having to pay extra down payment funds compared to a traditional mortgage. Like many traditional mortgages, the typical down payment for a construction loan is also around 20%.
Some lenders may require as little as 10% down, but you’ll need to pay private mortgage insurance if you put less than 20% down. A good credit score of 720 or better can also increase your likelihood of getting approved for a new build loan.
What is the interest rate for building a new home? Interest rates for new homes may differ for new builds compared to getting a mortgage for a home that already exists. They typically have a slightly higher interest rate compared to traditional mortgage rates.
You may be wondering whether you can lock in an interest rate on new construction. You may be able to lock in interest rates for new homes, depending on the lender.
Some lenders will offer a locked-in interest rate for new homes for as long as you need to construct the home, while others will provide a certain number of days for a locked-in rate. You can shop around and compare rates to find the best terms and options.
Also, if you choose to convert your construction loan to a permanent mortgage loan once the build is complete, you may be able to lock in an interest rate for your mortgage. Even if you pay a variable rate during the shorter time frame of the new home construction loan, you could lower your interest rate for the lifetime of your mortgage loan.
Lenders like to invest in new home construction when they are confident about the project. They want to know it will be completed on time and within budget.
When you work with a new home construction company like Brookfield Residential, you can rest easy knowing you’re working with an experienced home builder. Our expertise of 65 years in new home building will come in handy when you begin applying for loans.
We build new construction homes all over North America, offering something for everyone with single-family homes, condos, townhomes, and duplexes. Our dedicated team is ready to support you throughout the entire buying process, from applying for your mortgage, to getting keys in your hand! Contact us for more information on finding your dream home.