Here are some things you need to know about funding your new-build:
1. Keeping Your Current Home
Some homeowners opt to sell the house they are living in and move into a rental property while they are building their new home. Others want to remain where they are and sell after the new house is ready. Whether this second option is possible depends on your debt-to-income ratio. Your lender will look at your debts and your gross monthly income and determine whether you able to carry the total amount of debt for two mortgages.
2. Construction Mortgage Basics
When you are looking for a loan to finance the build of a new house, there is no physical house as yet to secure the loan against, so the lender must rely on the information you give about the house that will be built. You will be required to submit items such as a construction contract showing costs (or quotes for labor and materials if self-building), plans or blueprints, site preparation details, a deed or sale agreement for the land, confirmation that down payment funds are available, and confirmation of personal income.
Money from a construction loan is usually disbursed in three parts or “draws”. The first draw is usually released when the build is 35% complete, the second when it’s 65% complete and the third when it is 100% complete. An appraiser will have to inspect the construction at these three stages to verify to the lender that the work has been done. Usually, the lender requires that the home be completed within 12 months of the start date.
3. Qualified-Builder Homes
If you are purchasing a home that is already in the process of being built and is already financed by a professional home builder, the process of securing a mortgage is almost identical to the process of buying any existing home. Your mortgage payments will start when the builder is paid upon completion of the project, and the lender will have the security of a finished home.
4. Self-Builder Homes
If you have purchased land and intend to be your own general contractor, or if you have hired a qualified builder to manage the entire project for you, this is when the “progress draw” construction loan is used. You must ensure you have enough funds to float the project until the first stage of construction is complete. During construction, you only make the interest payments on the outstanding loan balance. Generally, when your new home is finished and inspected, the lender converts the loan into a regular mortgage. However, you can explore the option of taking a building loan with one lender and the mortgage on completion with another.
Remember, there’s no need to feel overwhelmed by the unfamiliar concepts. There are many satisfied owners of new homes who have navigated the borrowing process. You can, too!
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