How are you going to pay for this baby?
New construction is different than buying a traditional home. Before you get too excited shopping for a home you want interview a lender. You might not know that you have options, or how far your hard earned dollars go.
If you go through a national builder who has a preferred lender and title company, they’ll urge you to use that lender, and include some perks. With a new construction loan you give the builder an initial down payment towards construction when you sign contracts, and another one or two payments that total about 20% down payment. Some or all of that may be non-refundable depending on the contract you sign. I can actually feel you are getting a little nervous right now. That’s because there is always a risk that something could go wrong. Every builder intends to deliver you the home you expect. An experienced builder knows that there can be bumps, or unexpected challenges. He’ll let you know what is happening, and what they will do to fix it.
The builder’s preferred lender will take your loan application, and walk you through the whole process. Often there are either discounts or benefits offered through the builder that you can't get anywhere else. A construction loan is in two parts. The first part is a short term loan to finance the building that converts into a 30 year loan with the second closing.
You do have other options. You don’t need 20% down payment anymore. There is also a 30 year construction loan with 5 to 10% down payment (depending on credit and reserves) with one closing instead of two. This option makes new construction far more affordable for many people who don't have the 20% down payment. Qualifications are pretty much the same as for any conventional loan.
There is still a third option. If you are buying a move in ready home, that is simply a conventional loanwith several different down payment scenarios. Many people believe that you need a 20% down payment on a conventional loan, and that is not so. If you have good credit you can get a loan for as little as a 5% down payment. When interest rates are very low, as they are now, it doesn't make sense to use all of your available cash for a higher down payment then you need to. The other thing to understand is that there is no such thing as one interest rate. There are a range rates, depending on your credit, history and reserves. People sometimes think of loans as one size fits all. There isn’t one loan to squeeze into. Another misconception is that if they have a chunk of cash, credit doesn’t matter. It always matters. Lenders don’t like risking that you won’t pay back the loan. High risk loans pay high risk interest rates. Low risk loans pay lower rates.
Always want to compare apples for apples, and loan to loan. If an offer sounds too good to be true you want to do a side by side comparison of all fees, or interest-rate. You can do that by comparing
- Down payment amount
- Closing costs
- Extra closing costs if there are two closings
- Loan origination fees
- Administrative fees
- Total monthly payment.
- Total cost over the life of the loan
What may sound like a fantastic offer, may or may not have conditions the costs you more over the life of the loan. Unless you are well versed in how loans work, you could miss a piece. Every loan is advertised for benefits, never for restrictions. It is always smart to compare.
Now is not a good time to shop online lenders. Construction loans are specialized, and you don’t want your file in an online system with limited communication. Push button, Get Loan, Move In, is advertising, not reality. Every buyer has to provide the lender with job history, tax returns, credit scores, verification of residence, and bank statements. You want to work with a human who holds your interests in first place, has experience with construction loans, and has your back if there are glitches. If you meet with a lender before shopping for a new home, you’ll know your numbers, your comfort level, and if you can or can’t stretch. You’ll have confidence making decisions, and planning your gorgeous new home.